Revocable vs Irrevocable Trusts: What’s the Difference?

If you’re new to estate planning, trusts can seem complex. However, it’s actually simple to understand how trusts work. Below, our lawyers define the main types of trusts for estate planning, and how to choose the right option for you.

What Is a Trust?

A trust is a relationship, or arrangement, formed to manage assets. It’s created by a legal document and includes at least three parties:

• Trustor: The trustor creates the trust. The trust is created during their lifetime.
• Beneficiary: The beneficiary benefits from the assets held in the trust.
• Trustee: The trustee manages the trust on the beneficiary’s behalf. There may be more than one trustee, but they must make decisions jointly.

The trustee chooses which assets to place into the trust. You can place any type of asset – such as cash, real estate, or valuables – into a trust arrangement. You can also decide how the trust is managed.

Why use a trust? There are three main reasons.

• Assets placed into a trust can avoid probate, which is a lengthy process. Avoiding the probate process means your loved ones get their inheritance sooner.
• You can use a trust to reduce or avoid estate taxes.
• Assets placed into trust can help you qualify for benefits, such as Medi-Cal. Obtaining Medi-Cal is the California version of qualifying for Medicaid in other states. Assets in the trust are technically owned by you, so they’re considered for eligibility purposes.

Types of Trusts for Estate Planning

There are various types of trusts used in estate planning. The most common categories are revocable and irrevocable trusts.

Revocable Trust

Revocable trusts, also known as living trusts, can be changed, or revoked, at any time. The trustee can add or remove assets, and change beneficiaries, as their estate goals evolve.

The advantages:

• Revocable trusts are, by definition, flexible. They can be changed as often as you wish.
• You can use revocable trusts to avoid probate procedures.
• You still own the assets inside the trust, which has positive tax and benefits implications. The trust only becomes irrevocable upon death.

The downsides:

• The assets are subject to certain state and federal estate taxes upon your death.
• Since you own the assets until death, they’re not safe from creditors if you have outstanding debt.

Irrevocable Trust

Irrevocable trusts cannot normally be changed the moment they are created. They’re normally used for tax mitigation purposes because they help the beneficiaries minimize tax liabilities.

The pros:

• The terms are clear and predictable because the trust can’t usually be changed.
• Normally there is no estate tax payable on the assets held in the trust upon your death.
• Your assets may be safe from future creditors or seizure, e.g. if you’re sued as part of a civil lawsuit.

The cons:

• They are more complex to set up given the fact they are irrevocable.
• Attempting to change the trust requires costly court procedures.
• Irrevocable trusts have significant legal consequences if they’re not formed properly.

Differences Between Revocable vs Irrevocable Trusts

We can now summarize revocable vs irrevocable trust pros and cons, and the main differences between them.

All trusts can be used to protect assets and support the beneficiaries. They all work to help you reach your estate planning goals.

The main difference is that revocable trusts are easily changed. Irrevocable trusts are not. You might use revocable trusts to avoid probate. Whereas you may use irrevocable trusts to minimize tax liabilities and limit creditor reach.

Revocable trusts are simpler to create and easily modified, but have less asset protection. Irrevocable trusts are more robust, but they can’t be changed and could have significant consequences.

Best Trust for Estate Planning

What are the advantages and disadvantages of a trust? And which type of trust is right for you? We highly recommend contacting our California trust attorneys for personalized advice. After all, every estate is entirely unique.

The best trust is the one that protects your assets and minimizes your tax liabilities. Our estate planning lawyers will explain your options so you can do what’s best for your estate.

Protect your assets. Minimize your estate taxes. And give your loved ones financial security. Contact the Law Offices of Alice A. Salvo to learn how our estate planning lawyers can help you achieve these goals and more.