Differences Between A Revocable vs Irrevocable Trust

Revocable Trust is shown using the text

As you consider your options in creating an estate plan, you may find some terms confusing, or possibly too similar to tell apart. But understanding the differences between a revocable vs irrevocable trust can make a significant difference in your own access to funds during your lifetime, and your beneficiaries’ inheritances after your death. Before you sign any trust document, you should be sure to talk to an experienced estate planning attorney who can help you understand those differences and choose the best trust option for you.

What is a Revocable Living Trust?

A revocable living trust (or revocable trust) is an estate planning option available to anyone who wants to protect their assets, and their family, from extensive supervision by the Florida probate court after their death. A revocable trust is a legal entity (similar to a family LLC) that you, the grantor, set up while you are alive to manage your property while you are alive and distribute your assets to your intended beneficiaries upon your death. Once created, you can transfer property into the trust, funding it. This makes the trust the legal owner of the money, land, or other property. This allows you to keep your trust assets private, and not subject them to public scrutiny in Florida probate court.

As the name suggests, a revocable living trust can be revoked at any point during your lifetime. This allows you to retain control over your assets, and pull from the trust if needed to pay for future medical expenses, investments, or the day-to-day cost of living. Because of this, many people use revocable living trusts as an estate planning tool, creating and funding a revocable trust relatively early in their lifetimes, and adjusting its terms as their financial needs change.

What is an Irrevocable Trust?

An irrevocable trust is similar to a revocable trust except that once formed, an irrevocable trust cannot be easily amended, changed, or terminated. Again, as the name suggests, it cannot be revoked. An irrevocable trust can be formed three ways:

  • As a living trust during your lifetime (same as a revocable living trust)
  • Converting a revocable trust to an irrevocable trust upon your death
  • Funding an irrevocable trust through a pour-over Will which creates a trust upon your death, or through other estate planning tools such as insurance policies or transfer on death accounts

However, unlike a revocable trust, the creation of an irrevocable trust is final. In most cases, any changes to an irrevocable trust requires the consent of all the named beneficiaries who will eventually receive assets. The approval process for these changes can be long and complicated, and may send your family to probate court.

Revocable vs Irrevocable Trust, What’s the Difference?

While the ability to modify or revoke a trust is the defining feature of that trust, there are other differences between revocable vs irrevocable trusts that you should be aware of:

Estate Tax Benefits

One of the biggest reasons you might choose to fund a revocable vs irrevocable trust is if you are trying to avoid estate taxes or capital gains taxes after your death. Items placed in an irrevocable trust are considered “taxable gifts” on the year the transfer occurs, rather than when they are distributed to beneficiaries. As long as the value of the asset is below the gift tax limit, you will not have to pay gift taxes on them. If they subsequently increase in value (such as if you transfer stock ownership or real property into the trust), you will not be responsible for the capital gains taxes on that change in value because the trust owns the property, not you.

However, assets held in a grantor-controlled revocable trust are still treated as the grantor’s property for tax purposes. That means placing funds into a revocable trust will not save you money on your annual income taxes, or in calculating the estate tax paid after your death.

Trustee Designations

The person managing a trust is called the trustee. In most cases, as grantor, you and your spouse (if you create a joint trust) will name yourselves trustees during your lifetime, and then designate a successor trustee to manage the trust after you die or become incapacitated. That person retains the position until:

  • All the assets are distributed and the trust is closed
  • They resign or ask to be removed
  • Are replaced by the Florida Probate Court for violating their fiduciary duties

While some grantors retain trustee status over irrevocable trusts, certain types of irrevocable trusts, including those created upon death, put the assets under the control of a third party right away. This means that as grantor, you will have less control over the administration of your irrevocable trust than a revocable trust.

Asset Protection from Creditors

Because you retain control over your assets in a revocable living trust, your creditors can try to collect debts from those accounts. However, an irrevocable trust places those assets outside the reach of creditors.

A trust (of either type) also protects your assets from your beneficiaries’ creditors. Unlike a jointly held account, your beneficiaries do not have an ownership interest in your trust assets until they are distributed to them by the trustee. This allows a spendthrift trust to protect your assets from the poor decisions, or unfortunate life circumstances, of your beneficiaries.

Special Needs Trusts and Government Benefits

Another difference between revocable and irrevocable trusts is in the protections granted to beneficiaries who receive distributions from them. Many disabled individuals rely on government benefits such as Social Security which are “means-tested.” That means the person will only qualify if they are below a certain threshold of income. Money placed in certain irrevocable trusts, called special needs trusts, can be excluded from government “means tests.” You can even establish a “self-settled” special needs trust for your own benefit, but only if highly specific requirements are met. One such restriction is that the deposits into a special needs trust cannot be taken back – in other words, they must be treated as an irrevocable trust.

Get Help Deciding Between Revocable vs Irrevocable Trusts

At Harrison Estate Law, our estate planning attorneys know how to use revocable living trusts and irrevocable trusts to give our clients and their families the best financial outcomes in their estate plan. We know how important it is to follow up by funding your revocable trust, and the limits on modifying an irrevocable trust. We can help you be sure everything is set up right. Please contact us online or via email or call 352-559-9828 to schedule a free consultation. If you don’t live close to Gainesville we are happy to set up a phone or Zoom call. We are now available for extended evening and weekend appointments.

Categories: Trusts