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Trusts can be useful tools to protect your assets, save on estate taxes, or set aside money for a family member. You may be considering adding this kind of legal document to your own estate plan. Before you commit to establishing a trust, make sure you understand the differences between revocable and irrevocable trusts. Each type of trust offers its own advantages and downsides, depending on their purpose.

These two main types of trusts differ in structure and with regard to taxes. However, both serve as tools for setting aside your hard-earned assets and then passing them on according to your specific wishes. They can protect one’s property, safeguard a family’s financial future, and provide tax-saving strategies.

Revocable Trust vs. Irrevocable Trust: Differences in Structure

Once you establish an irrevocable trust, you cannot cancel or revoke it. The person creating the trust, sometimes called the “grantor,” transfers assets into the trust and permanently gives up all claims to them. A trustee then carries out the instructions spelled out in the trust. Any changes to the terms of the trust document require the consent of the trust’s beneficiaries.

In contrast, a revocable trust offers more flexibility. The grantor of a living trust still owns and controls the assets and can make changes at any time. The grantor typically acts as the trustee of their own trust. A successor trustee would take over management of the trust if the grantor is no longer capable of doing so.

Note that an institution can serve in the role of a trustee.

Can an Irrevocable Trust Be Changed?

You may worry that you will not be able to make any adjustments to an irrevocable trust if your wishes change over time. In fact, under certain circumstances, it is possible to create a new trust with revised terms through the process of decanting. You can then move the assets from the original trust into the new trust.

In an upcoming article, we will discuss the process of modifying an irrevocable trust through decanting.

What Is the Difference Between Revocable and Irrevocable Trusts With Regard to Taxes?

Both types of trusts offer tax advantages, although these differ in key ways.

As an irrevocable trust is considered a separate entity, it may need to have its own tax returns filed annually under its tax ID number. Irrevocable trusts can incur additional costs if a certified public accountant (CPA) is necessary for tax preparation.

Because it is a trust and not an individual, the irrevocable trust cannot qualify for the various deductions and exemptions that individuals can claim on their returns, but irrevocable trusts do have their own deductions and exemptions. Also, higher income tax rates apply at lower income levels.

For example, an irrevocable trust is subject to the highest federal tax rate of 37 percent if its income exceeds $15,200 in 2024. (Note that this is a much lower ceiling than for individuals. The maximum tax rate for an individual would begin after $609,350 of ordinary income, as of 2024.)

Assets within a revocable trust, however, are still considered the property of the trust owner. Any income you earn from this type of trust is filed along with your other income. Assets in a revocable trust remain in the grantor’s own social security number.

Also, the assets of a revocable trust belong to the owner’s estate. This means they are taxed accordingly upon the owner’s death. For this reason, wealthy families may choose to transfer a portion of their assets into an irrevocable trust. This can help in keeping the value of their estate below federal and state exemptions.

Protecting Assets in the Future

One key advantage of irrevocable trusts is that they can provide asset protection from lawsuits and creditors. Hence, the reason people create irrevocable Medicaid protection trusts. A revocable trust offers no such protection because the trust assets are still part of the owner’s property.

Revocable trusts are an option for people who do not need all the layers of protection but still want to set up some provisions for the future and avoid probate of a Will. A revocable trust also works well to set aside assets should the grantor ever become unable to manage their finances in the future, potentially because of illness or old age.

With this type of trust, the grantor controls the property while they are competent. The trustee can take over this function if the grantor loses this capacity.

Work With an Estate Planning Attorney

You may be trying to navigate specific considerations, such as planning for estate taxes or protection from creditors. Perhaps you are looking to provide for the future well-being of a family member who has a disability. In certain cases, an irrevocable trust might be the better way to go. The experienced estate planning attorneys at Kommer Bave & Ciccone LLP will have the best answers and estate planning tools to suit your particular circumstances.

Keep in mind that this is general advice only. An estate planner in your state versus another state may treat specific situations differently, as state laws vary. Contact the estate planning attorneys at Kommer Bave & Ciccone LLP for advice on how to handle your situation using different types of trusts.

For additional reading, consider revisiting the following previous articles on trusts:

• Understanding Revocable Trusts
• Understanding the Common Types of Trusts

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