Revocable or Irrevocable: Which Trust Do You Need?
Revocable and Irrevocable: Which Trust Do You Need?
Although there are many- I repeat- many types of Trusts out there; two broad categories that should be understood first is simply whether the trust will be revocable or irrevocable.
The difference between the two is in the name itself. One can be revoked (changed or cancelled) at your discretion, the other cannot. So, that begs the question, if you can change one but not the other, why would you go with the one that couldn’t be changed?
The answer to this primarily comes down two factors:
Estate tax planning
Asset preservation
With a revocable trust, you still own the assets. If you put in $1 million into a trust account, you maintain ownership of that $1 million. Technically, the trust owns it, but since you can change or cancel that trust any time you like, you still maintain control and beneficial ownership of it. This is why when you pass, all the money in that trust is still considered to be a part of your estate, and could potentially be taxed (although the estate tax exemption if very high at almost $14 million as of 2025).
So, the revocable trust does nothing for you in terms of estate tax planning. Likewise, it also doesn’t protect money from creditors and lawsuits. Why? For the same exact reason, you still maintain control and beneficial ownership of it.
The revocable trust is meant for someone who wants to maintain complete control of the assets both while they’re living and after they pass. Think of it like a suitcase with very specific instructions inside for how the contents of the suitcase (your assets) are to be handled after you pass, or if you become incapacitated. You keep the suitcase by your side, and you have the right to open it and change it any time you want.
The irrevocable trust, on the other hand, is also like a suitcase with specific instructions inside. But the difference is, you don’t keep that suitcase by your side and you don’t get to open and change it when you want. Once that suitcase is closed, it stays where it is and stays unattached to you. And this is precisely why it’s not considered to be a part of your estate or a part of your assets that creditors could claim, because you have given up control and ownership of it.
For most, a revocable trust is the estate planning tool of choice because their estate size won’t be subject to estate tax, and they aren’t particularly worried about creditors/lawsuits (there are also other ways to protect yourself against those). In most cases, the trust is being used as a way to avoid probate and a way to have control over your assets both while they’re alive and after they pass.
But for some, an irrevocable trust can be absolutely essential, and can potentially save millions in estate taxes.
If you’re wondering which kind of trust is right for you, it’s important to talk to a professional. There is a lot of nuance when it comes to estate planning and it is vital it is done correctly.
As always, feel free to reach out to our team for guidance.
Ryan Page, CFP®, MBA®
Office & Text:720-826-1092
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
