Revocable trusts vs. irrevocable trusts

How does a trust work?

Trusts are versatile financial tools used for many different purposes, such as estate planning, asset protection, and charitable giving. When the creator, or grantor, sets up a trust, they retitle assets in the name of that entity. There are different types of trusts, and in various circumstances, a trust can help minimize taxes, help with business succession, fund education, plan for family members with disabilities, or distribute inheritances over time rather than all at once.

The structure of a trust varies based on its purpose and the preferences of whoever sets it up, but at its most basic, a trust is a legal arrangement that allows one party to transfer assets or property to the control of a second party for the benefit of a third party. Those three parties are:

Grantor/Trustor – This is the person who creates the trust and transfers assets or property into it. They outline the terms and conditions of the trust in a legal document, known as the trust agreement or trust deed.

Trustee – This party is responsible for managing and administering the trust according to the instructions provided by the trustor. They are usually paid and have a legal duty to act in the best interests of the beneficiaries. Trusts can have individual trustees or corporate entities serving in this role.

Beneficiary – Beneficiaries are the individuals or entities who will ultimately benefit from the trust. They receive income, assets, or other benefits as specified in the trust agreement. Beneficiaries can include family members, charities, or even the trustor themselves.

It's essential to work with legal and financial professionals to set up a trust that aligns with your unique financial goals and needs. Learn more about the basics of trusts.

Why use a trust at all?

For many, a simple last will and testament is enough to distribute their wealth to heirs and beneficiaries. However, for families with higher net worth, trusts can become a very important tool in estate planning. With a will, an executor is responsible for following the wishes of the deceased. They are legally required to act in the best interests of the estate and beneficiaries. Before assets can go to heirs, the estate usually must pay off creditors and taxes. This legal process, supervised by a court, is called probate. Trusts can help eliminate the need for probate and, when used properly, can protect assets from debts or taxes.

What is a revocable trust?

A revocable trust, often referred to as a "living trust," can be altered, modified, or revoked by the grantor during their lifetime. They retain control over the assets in the trust and can add, remove, or change terms or beneficiaries whenever they want. The grantor can also function as the trustee if they desire.

One of the main uses for a revocable trust is to distribute assets to beneficiaries without going through probate court, which can be a slow and costly process. Also, since probate is in the public record, a trust can help keep the privacy of the family and their assets intact. It’s important to note, however, that a revocable trust does not shield assets from creditors or lawsuits like an irrevocable trust does.

Who needs a revocable trust?

Trusts are usually used by families with substantial assets to help with estate planning by reducing the costs, delays, and privacy concerns of probate. They can also come in handy if you have many different people you would like to give assets to, as their clear definitions can help avoid family disputes. Another common use of revocable trusts is to help with the special needs and disability planning of a loved one.

What is an irrevocable trust?

In contrast, an irrevocable trust, once established, generally cannot be altered, modified, or revoked by the person who sets it up without the consent of each beneficiary. Once assets are transferred into an irrevocable trust, the trustor gives up direct control over those assets to a separate trustee and the terms and conditions become legally binding. The assets in the trust are basically no longer “yours.”

While at first glance that may sound like an unfavorable option, an irrevocable trust has many benefits. Because you functionally no longer own the assets in the irrevocable trust, they aren’t included in your taxable estate, which can help your family avoid significant taxes. The trust can also shield those assets from creditors or lawsuits that might diminish your estate. This can be particularly important for those in professions where there is a higher risk of lawsuits, such as lawyers and doctors.

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Who needs an irrevocable trust?

If you expect your estate will be over the estate tax threshold ($13,610,000 in 2024), have large debts, or are at risk of lawsuits, an irrevocable trust could be a valuable option to ensure your assets get transferred to your beneficiaries as you intend.

The difference between revocable and irrevocable trusts

Revocable and irrevocable trusts are set up in similar ways and can offer many of the same benefits. Both types help protect your family’s privacy and offer the ability to bypass probate court. That said, they are used in different scenarios. The most important of which is that you can alter revocable trusts, while altering details of an irrevocable trust is much more difficult. Here are some of the key differences and benefits of each:

Which is better?

That will depend on your situation and needs. Each has specific uses that can help a family with creating a comprehensive estate plan. Often, high-net-worth families will use many interconnected trusts of both types for different purposes. Before establishing a trust, it’s important to understand which trust or trusts will best serve your needs. A dependable estate planning attorney, along with a tax advisors and a financial professional can help you build a plan to ensure that your wealth is transferred to heirs and beneficiaries as you wish.

Revocable and irrevocable trust FAQs

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This article is for your general informational purposes only. Neither New York Life Insurance Company, nor its agents, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.