In very simple terms, the main difference between a revocable trust and an irrevocable trust is that a revocable trust, as the name implies, can be revoked. An irrevocable trust cannot. It is crucial that the grantor (party who creates the trust) understands this difference when creating the trust. The differences in the legal and tax consequences of each are significant.
Revocable Trusts – Also referred to as a Revocable Living Trust or a Living Trust, the grantor maintains ultimate control of the trust. The grantor, at any time can change the trust or revoke it altogether. Since the grantor maintains ultimate control, the trust will still be considered a personal asset of the grantor for creditor and estate tax purposes. There are a few good reasons for creating a revocable trust:
- If the grantor becomes legally incapacitated, the trust can be managed by the Trustee instead of a court-supervised guardian or conservator.
- Trust assets would, upon the death of the grantor pass directly to the beneficiaries named in the trust agreement and outside of probate.
- By avoiding probate, the grantor can keep the details about trust assets private. Probate records are made public.
Irrevocable Trusts – An irrevocable trust is simply a trust that can’t be modified or revoked after the agreement has been signed. The reasons for creating an irrevocable trust include:
- For purposes of estate planning, irrevocable trusts are used to remove the value of property from the grantor’s estate. If the grantor no longer owns the assets they cannot be taxed upon death.
- An irrevocable trust can also be used for charitable estate planning. If the grantor transfers assets into the trust while living, the grantor receives a tax deduction for the tax year the contribution was made. Or, the transfer can wait until the grantor’s death, in which case, the grantor’s estate will receive the deduction.
- Another common use for an irrevocable trust is to provide asset protection. Similar to the tax planning concept, a creditor cannot claim assets if the grantor no longer owns them.
There are many more reasons for establishing revocable and irrevocable trusts than can be covered in the space of this article. The best course of action for anyone contemplating a trust would be to seek the advice of an experienced Trusts and Estates attorney.
This article is provided as information only and not intended as legal advice in any means or manner whatsoever, Attorney Adrian Philip Thomas is an Estate Planning Attorney in Florida , and has provided this for informational purposes only.
