Revocable vs. irrevocable trusts: Similarities & differences

A trust is a legal arrangement that dictates the ownership, management and transfer of assets. Those assets might include money, real estate, stocks, personal belongings and more. Trusts are often used for estate planning, and there are two main categories: revocable trusts and irrevocable trusts.

What you’ll learn:

• There are two main types of trusts: revocable and irrevocable.

• Revocable trusts can be changed or revoked during the grantor’s lifetime.

• Irrevocable trusts typically can’t be changed or revoked except by court order or a legal process known as decanting. 

• Revocable trusts and irrevocable trusts also have different tax implications, rules about trustees and more.

Each state has its own laws about trusts, so it’s important to understand your state’s rules and requirements. But no matter what state you’re in, all trusts create a relationship between three parties:

1. Grantor: The person who creates the trust. They typically own the assets that were put into the trust.

2. Trustee: An individual, a group of individuals or a financial institution that manages the trust and administers it to the beneficiaries. Trustees have a legal responsibility to always act in the best interests of the beneficiaries. 

3. Beneficiary: The person who receives the assets and benefits from the trust. There can be multiple beneficiaries of a single trust.

A revocable trust, sometimes called a living trust, can be changed or revoked after it’s created. The grantor can name themself as the trustee. This lets the grantor maintain control over the assets in the trust, including the ability to buy, sell or withdraw assets without going through a third party. 

Because the grantor still has access to them, the assets in the trust remain part of their taxable estate. This means revocable trusts may be subject to state and federal estate taxes. The grantor is also responsible for paying income taxes on any earnings generated by the trust. Plus, revocable trusts may also be subject to creditor claims and legal judgments. 

Once the grantor dies, a revocable trust automatically becomes an irrevocable trust.

Irrevocable trusts generally can’t be easily changed or revoked. Typically, only a court order or decanting—a legal process that transfers an existing trust to another—can make changes to an irrevocable trust.

Unlike a revocable trust, assets in an irrevocable trust are generally removed from the grantor’s taxable estate. The grantor gives up control and access to the assets in the irrevocable trust. And the trust itself—not the grantor—is typically responsible for paying any applicable income tax.

Irrevocable trusts often aren’t subject to estate taxes either. And irrevocable trusts are generally protected from creditor claims and legal judgments.

Establishing a trust can help people specify how and when their assets are distributed to their beneficiaries. And that can help simplify managing family finances after a death.

Trusts are also much less likely than wills to have to go through the probate court process. Going through probate can increase costs and lead to court documents becoming public. A trust can help beneficiaries avoid probate fees, keep family matters private and make estate settlement faster. 

If you’re trying to decide whether a revocable trust or an irrevocable trust is best, you could compare flexibility, control, tax implications and protections. Here are a few key differences between revocable and irrevocable trusts:

Trusts serve as a legal framework to manage and transfer assets as part of estate planning. They take two forms, revocable and irrevocable, which have key differences when it comes to flexibility, control and tax implications.