Revocable Living Trust vs. Irrevocable Living Trust: Which One Should You Choose?

When it comes to estate planning, a living trust can be a powerful tool to ensure your assets are managed and distributed according to your wishes after your passing. A living trust, or inter vivos trust, is a legal arrangement where you transfer ownership of your assets into the trust during your lifetime.

What is a Revocable Living Trust?

A revocable living trust allows you to place your assets in the trust while you are still alive. The defining feature of a revocable living trust is its flexibility— you, as the grantor, retain full control over the assets in the trust and can modify, amend, or revoke the trust at any time.

Once you pass away, the trust becomes irrevocable, and the designated beneficiaries will gain access to the trust assets.

Key Benefits of a Revocable Living Trust

• Avoids Probate: One of the main advantages of a revocable living trust is that it allows your assets to bypass probate, meaning they are distributed to your beneficiaries without going through the lengthy and often expensive probate process.
• Control and Flexibility: You can adjust the trust at any time during your life. Whether it’s adding or removing assets or changing beneficiaries, you can ensure your trust remains aligned with your current wishes.
• Peace of Mind: In case of physical or mental incapacity, a revocable living trust ensures that your assets are managed according to your specifications, giving you peace of mind knowing your wishes will be followed.

Potential Drawbacks of a Revocable Living Trust

While revocable living trusts offer flexibility, there are also some limitations to consider:

• No Protection from Creditors: Since you retain control over the trust assets, those assets can still be targeted by creditors in case of a lawsuit or legal claim.
• Cost and Complexity: Setting up a revocable living trust can be more expensive than creating a basic will due to the legal fees and the ongoing administration required.
• No Tax Advantages: Unlike some other estate planning tools, revocable living trusts don’t provide tax benefits. The assets in the trust are still part of your estate, and you may be liable for estate taxes.
• Ongoing Maintenance: A revocable living trust requires careful management and periodic updates, especially if there are significant changes in your life or asset holdings.

What is an Irrevocable Living Trust?

An irrevocable living trust is similar to a revocable trust, but with one key difference—you cannot modify, amend, or revoke it once it’s created. Once you transfer assets into an irrevocable trust, they are no longer considered your property. The trust owns them, and you lose control over how those assets are managed.

Key Benefits of an Irrevocable Living Trust

• Strong Asset Protection: Since the assets are no longer yours, they are generally protected from creditors, lawsuits, and other legal liabilities.
• Estate Tax Savings: By removing assets from your estate, an irrevocable living trust can help reduce estate taxes for your heirs.
• Eligibility for Government Assistance: If you or a loved one require government benefits, such as Medicaid, placing assets in an irrevocable trust may help you qualify by lowering your countable assets.

Potential Drawbacks of an Irrevocable Living Trust

• Loss of Control: Once assets are transferred into an irrevocable trust, you can no longer access or control them. If you want to make changes, you’ll need to go through a formal legal process.
• Cost and Complexity: Establishing and maintaining an irrevocable trust can be complex and may involve significant legal and administrative fees.
• Limited Flexibility: Once an irrevocable trust is in place, its terms cannot be easily changed, which could create complications if your circumstances change in the future.
• Tax Considerations: Transferring assets to an irrevocable trust can result in gift taxes, and the trust itself may require separate tax filings.

Key Differences Between Revocable and Irrevocable Trusts

Common Types of Irrevocable Trusts

Several types of irrevocable trusts are available, but three of the most common are:

• AB Trust: Often used by married couples, the AB Trust helps reduce estate taxes. After one spouse passes away, the trust splits into two parts, with one part going to the surviving spouse and the other being held in trust for future distribution.
• Life Insurance Trust: This trust is designed to hold life insurance policies, so the proceeds are not counted as part of your estate for tax purposes. It also allows you to dictate who will receive the policy's benefits.
• Charitable Trust: A charitable trust allows you to donate a portion of your estate to a charity. You can structure the trust so that your heirs receive their share first or direct the charity to receive funds before distributing remaining assets to your family.

Choosing Between a Revocable or Irrevocable Trust

Deciding between a revocable living trust and an irrevocable living trust depends on your estate planning goals. If flexibility, control, and the ability to make changes are important to you, a revocable living trust may be the right choice. On the other hand, if you’re looking for asset protection, estate tax reduction, and eligibility for government programs, an irrevocable living trust may better suit your needs.

At Doane & Doane, PA, we specialize in helping individuals and families create personalized estate plans. Whether you’re considering a revocable living trust or an irrevocable living trust, our experienced attorneys are here to guide you through the process.