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Revocable vs. Irrevocable Trust: What's the Difference?

Author: Marguerita Cheng

The decision whether to choose a revocable or irrevocable trust for the protection of assets can have lasting implications and profoundly impact a legacy, so it’s not something to be taken lightly. 


Estate planning is an integral part of financial planning for high-net-worth clients, and a critical component involves the use of trusts. The decision whether to choose a revocable or irrevocable trust for the protection of assets can have lasting implications and profoundly impact a legacy, so it’s not something to be taken lightly.


“Trusts can be a powerful vehicle to accomplish a client’s goals, but (they) do come with some risks and drawbacks,” says former estate planning attorney Steven Schoenberger, a certified financial planner (CFP) professional and founder of Open Door Financial in Minneapolis, Minnesota.

This guide outlines the nuances of revocable and irrevocable trusts to help you sharpen your insights and know when you are receiving precise and appropriate guidance from a financial advisor:

What Is a Revocable Trust?

A revocable trust, also known as a living trust, is a flexible estate planning tool. “You retain control of your assets within a revocable trust during your lifetime,” says Ryan Langan, a CFP professional, founder and lead financial planner of Your Path Fi. Grantors can add new beneficiaries, exclude others or change how the trust’s assets are managed at any time.


While these features are appealing to those who value flexibility, it’s important to note that a revocable trust does not have tax benefits. “A common misconception about revocable trusts is that they avoid estate taxes. This is not true; there are no tax advantages to using a revocable trust,” says Langan.

It doesn’t provide creditor protection, either. Assets within a revocable trust can be accessed by creditors at any time to satisfy legal judgments.


Advantages of a Revocable Trust


Depending on your estate planning goals, a revocable trust offers several key advantages:

Flexibility. Revocable trusts can be revised to reflect your current wishes or life changes at any time before death.

Privacy. A revocable trust ensures estate matters remain private by circumventing the probate process, which becomes public record.

Incapacity planning. Revocable trusts can establish appropriate measures for asset management if you become incapacitated.


Limitations of a Revocable Trust


While revocable trusts offer many advantages, there are drawbacks that may make them unappealing to some people:


Tax neutrality. Revocable trusts don’t provide tax advantages during your lifetime or after your death.

Creditor exposure. Assets within the trust may be claimed by creditors at any time to settle legal actions.


The versatility of a revocable trust can make it an appealing choice to house assets that will ultimately be passed on to beneficiaries. But if you’re more concerned about tax advantages, an irrevocable trust may be the better option.


What Is an Irrevocable Trust?


An irrevocable trust is definitive once established. Its terms can be changed only in rare situations and typically only with the agreement of all beneficiaries, a process that varies according to state laws.

“Much thought and planning should be put into place when creating (irrevocable trusts), as once they are established, they are set in stone, so to speak,” says Kyle Newell, a CFP professional and owner of Newell Wealth Management in Winter Garden, Florida.


The primary appeal of irrevocable trusts is the tax benefit. Assets transferred to an irrevocable trust usually escape estate taxes upon the grantor’s passing, offering a strategic avenue for estate tax savings.


Importantly, irrevocable trusts can also provide a shield against creditors. Amar Shah, a chartered financial analyst, CFP professional and owner of Client First Capital in San Diego, California, provides a case study of a client who was the beneficiary of an irrevocable trust that allowed an independent third-party trustee to make discretionary distributions. “This allowed them to dial down the income when the client’s business was going under and creditors were looking to force payment,” says Shah.


As such, the legal structure of the trust offered protection from asset seizure in a way that a revocable trust could not have.


Advantages of an Irrevocable Trust


High-net-worth clients should take note of the strong advantages of irrevocable trusts:


Tax benefits. Placing assets in an irrevocable trust can significantly minimize estate taxes, which is often a top concern for high-net-worth individuals.

Asset protection. Assets placed in an irrevocable trust are often safe from creditor claims.

Long-term-care planning. Trust assets are often not counted when determining eligibility for Medicaid and other assistive services.

Limitations of an Irrevocable Trust


While tax and credit protection are often desirable, the limitations of irrevocable trusts can make them a poor choice for some people:


Fixed control. You must be comfortable with the loss of control over your trust assets. A grantor cannot individually change the terms of the trust’s distribution.

Trustee dependence. Access to trust assets is mediated by a trustee. Once established, the trust can only be amended at the discretion of the beneficiaries.

Complexity and cost. Setting up and maintaining these trusts can be complex and may add extra costs to the process.

Tax savings may not always be the primary goal of high-net-worth individuals. Irrevocable trusts are a popular option, but the inflexible terms and complexity can turn off some people.


Key Differences Between Revocable and Irrevocable Trusts


It’s crucial to understand the main differences between revocable and irrevocable trusts. “The key difference between the two is that in an irrevocable trust, you are removing ownership of those assets and therefore your beneficiaries gain protection that they cannot get on their own,” says Shah.

Flexibility. With the added protection, you are giving up flexibility. Once established, the distribution terms of an irrevocable trust can’t be changed. “No alterations can be made without the agreement of everyone who benefits from the trust, which can be a complex hurdle,” says Schoenberger.

Privacy. Another significant consideration that is often overlooked is privacy. Revocable trusts stand out when it comes to discretion: Their contents stay private even after the grantor’s death. Such discretion is not guaranteed in the case of irrevocable trusts. While their contents generally offer privacy, any legal proceedings involving the estate could inadvertently reveal information to the public.

Which Trust Is Best for High-Net-Worth Individuals?

“To simplify it, revocable trusts are going to be for those who want to avoid probate. Irrevocable trusts are for those who want to avoid estate tax,” says Erik M. Baskin, a CFP professional and founder of Baskin Financial Planning in Dayton, Ohio. The decision, however, is not always so definitive. Many estate plans have a combination of revocable and irrevocable trusts. “It depends on the client’s current goals and needs versus future desires,” says Shah.

​​Financial advisors counsel clients on their estate planning needs according to several factors:


Financial goals and concerns. Explore what you want to achieve with your wealth before and after death. For example, are you looking to leave a legacy or a gift to heirs, or to support philanthropic causes?

Creditor or lawsuit concerns. Assess your vulnerability to potential financial threats. Are you anxious about creditors or legal entanglements that could impact your estate?

Tax implications. Examine your current tax exposure alongside possible future tax legislation that might affect your estate planning. How much do you value tax savings?

Need for flexibility. Evaluate your need for a flexible plan that can adapt to life’s unpredictable financial and personal changes.

Protection needs. Do you want to shield assets from potential risks, such as creditors, marital splits or legal issues that could jeopardize your wealth?

Long-term-care needs. Consider the role of the estate in long-term-care planning, including how it may affect eligibility for Medicaid and related benefits.

“High-net-worth clients typically use revocable trusts to avoid the probate process,” says Newell. He warns that probate can often be a lengthy and painful court process.


However, undergoing probate may be worthwhile for some, given the benefits that an irrevocable trust provides. Langan advises, “High-net-worth individuals may find value in using an irrevocable trust, as the assets in the trust pass to heirs estate tax-free.”

“For a family that is nowhere near the estate tax exemption, a revocable trust is likely going to make more sense as it allows them to avoid probate and flexibly determine the disposition of their assets,” says. However, he explains that families with estate tax concerns should look at irrevocable trusts “especially as we approach the sunset of the 2017 Tax Cuts and Jobs Act in 2026, which will cut current exemption limits in half.”

Newell agrees, saying, “This significantly increases the population who may want to consider some level of irrevocable trust planning within the next couple of years.”

What to Look For in an Advisor for Estate Planning

Direct and regular communication with a financial advisor is vital. This not only helps maintain a solid relationship, but it also ensures that your financial planning strategy meets your evolving needs.


As Shah points out, advisors have “a closer pulse on the assets of a client than an attorney would.” This can lead to significant savings through a proactive estate planning process. For example, particularly with revocable trusts, it’s important to follow through and fund them properly. “Once you get the documents signed and notarized, the assets need to be retitled in the name of the trust.” An advisor should stay on top of the process to avoid missteps.


Be mindful of costs and changes in personal interactions that may arise years or decades down the road, says Schoenberger. These are critical considerations that extend well beyond the signing of a trust document.

Addressing the selection of a successor trustee is another area where an advisor can provide value. “Most people default to the oldest child,” Shah says. “However, even if that child would want to serve in that role, many do not have the time or experience to deal with the complex affairs of the family.” As a result, unnecessary family tension is an all-too-common occurrence.


Financial advisors can help clients navigate these decisions, balancing personal dynamics with practical suitability. “Ultimately, it comes down to what the family’s financial situation looks like, and what their goals and objectives are,” says Baskin.

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Renee E. Nesbit, Attorney at Law

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The information contained on this website is presented for informational and marketing purposes only and is not to be understood as legal advice. You should consult an attorney for advice respecting your individual needs. Renee E. Nesbit, Attorney at Law looks forward to speaking with you about your particular needs. Please note, however, that the mere act of contacting our firm does not create an attorney-client relationship. As a result, you should never send any confidential information to our office until a Representation Agreement has been signed by both you and Renee E. Nesbit, Attorney at Law.

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