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.