Key Differences Between Revocable and Irrevocable Trusts

One of the most important estate planning decisions you can make is how you want to pass on your assets. For many people, setting up a trust is a critical step in the process, and there are two key types of trusts that our attorneys work with frequently: revocable trusts and irrevocable trusts. 

Understanding the differences between these two types of trusts is key to making an informed decision that aligns with your goals for your estate. Our Upper Marlboro, MD estate planning lawyers at Sanders & Sanders, Attorneys at Law are here to help. 

We’ll walk you through the key differences between revocable and irrevocable trusts, and explain how these differences can impact your estate planning. Whether you’re just beginning your estate planning journey or are looking to revise your current plan, having a clear understanding of these options will help guide your choices.

What Is a Revocable Trust?

A revocable trust, also known as a living trust, is a trust that we can set up and modify during our lifetime. Essentially, it allows the person who creates the trust (the grantor) to maintain control over their assets, including the ability to alter the terms of the trust or revoke it entirely. 

Because it’s revocable, the grantor can: 

• Change beneficiaries

• Add or remove assets

• Make other adjustments whenever they choose, as long as they’re alive and mentally competent. 

One of the primary benefits of a revocable trust is its flexibility. As life circumstances change—whether due to marriage, divorce, the birth of children, or simply a shift in financial situations—the terms of the trust can be updated to reflect these changes. This flexibility is one reason many of our clients prefer revocable trusts.

Control Over Assets

A revocable trust allows you to retain control over your assets while you’re alive. Unlike a will, which takes effect only after our death, a revocable trust can be used to manage assets while you’re still living. As long as you’re mentally competent, you can also change the terms of the trust at any time, or even dissolve it completely.

Privacy Benefits

Another key advantage of revocable trusts is privacy. Unlike a will, which is a public document once it’s filed with the court, a revocable trust doesn’t have to go through the probate process. This means that upon your death, your trust’s assets aren’t subject to public disclosure, which can be appealing to those who want to keep their affairs private.

However, while revocable trusts do avoid probate, they don’t necessarily provide complete protection from creditors or legal claims against the estate.

What Is an Irrevocable Trust?

An irrevocable trust, as the name suggests, is a trust that can’t be changed, modified, or revoked once it’s created. Once the assets are transferred into an irrevocable trust, they no longer belong to the grantor. 

Instead, the trust becomes the legal owner of the assets, and the grantor loses control over them. This may sound like a significant disadvantage, but irrevocable trusts can offer some unique benefits that make them appealing in certain estate planning situations.

While revocable trusts offer flexibility, irrevocable trusts offer permanence. The grantor can’t change the terms of the trust, which can provide greater certainty for beneficiaries. This permanent nature can be particularly beneficial when the goal is to protect assets from estate taxes or creditors.

Protection from Creditors

One of the main reasons people consider irrevocable trusts is the protection they offer from creditors. Since the grantor no longer owns the assets in the trust, those assets are generally shielded from creditors’ claims, lawsuits, or bankruptcy proceedings. This makes irrevocable trusts a useful tool for protecting wealth from potential financial threats.

Estate Tax Benefits

Irrevocable trusts can also provide significant estate tax benefits. Because the grantor no longer owns the assets in the trust, they’re typically excluded from the grantor’s estate for estate tax purposes. 

This can help reduce the overall value of the estate, potentially lowering the amount of estate taxes owed. For those with substantial estates, an irrevocable trust may be an essential part of their tax-saving strategy.

Medicaid Planning

In some cases, an irrevocable trust can be used as a tool for Medicaid planning. By transferring assets into an irrevocable trust, the grantor may be able to reduce their countable assets for Medicaid eligibility purposes. 

However, there are strict rules surrounding Medicaid and irrevocable trusts, including a look-back period, so it’s crucial to work with our experienced Maryland trust lawyers when considering this strategy.

Key Differences Between Revocable and Irrevocable Trusts

Flexibility vs. Permanence

The most significant difference between revocable and irrevocable trusts is flexibility. A revocable trust allows you to change the terms, add or remove assets, or even dissolve the trust entirely. This flexibility is beneficial when you anticipate changes in your life, such as new beneficiaries, changes in financial status, or changes in the law.

On the other hand, an irrevocable trust offers permanence. Once you transfer assets into an irrevocable trust, those assets are no longer yours to control. While this loss of control may seem like a disadvantage, it can be beneficial for certain estate planning goals, such as asset protection or reducing estate taxes.

Control Over Assets

With a revocable trust, you maintain control over the assets in the trust. As the grantor, you can act as the trustee and make decisions about how the assets are managed. 

However, with an irrevocable trust, the grantor relinquishes control over the assets. The trustee (who may or may not be the grantor) is responsible for managing the trust, and the grantor can’t make changes without the consent of the trustee or the beneficiaries.

This difference in control is one of the most important factors to consider when choosing between these two types of trusts. If retaining control is important to you, a revocable trust may be the better choice. If you’re comfortable giving up control in exchange for the benefits of asset protection or tax savings, an irrevocable trust may be more suitable.

Tax Implications

Both revocable and irrevocable trusts have tax implications, but they differ in key ways. Assets in a revocable trust are still considered part of the grantor’s estate for tax purposes. This means that any income generated by the trust is taxed to the grantor, and the trust’s assets are included in the grantor’s estate when they pass away.

In contrast, assets in an irrevocable trust are generally not included in the grantor’s estate. This can help reduce the overall size of the estate, potentially lowering estate taxes. Additionally, income generated by the trust may be taxed to the beneficiaries, rather than the grantor.

Probate Process

One of the primary advantages of both types of trusts is that they allow assets to avoid the probate process. Probate is the legal process through which a court validates a will and distributes assets to heirs. Both revocable and irrevocable trusts allow assets to pass directly to beneficiaries without probate. This can save time, reduce costs, and maintain privacy.

While revocable trusts avoid probate, irrevocable trusts offer additional protections. For example, irrevocable trusts may provide enhanced asset protection, preventing creditors from making claims against the trust’s assets.

• Further reading: The Probate Process in Maryland

When to Choose a Revocable Trust

For many, a revocable trust may be the ideal choice, especially if you value flexibility and control. A revocable trust allows you to make changes as your circumstances change, which is particularly useful for those who want to maintain control over their assets throughout their lifetime.

If you want to avoid probate, preserve privacy, and have the option to change the terms of the trust, a revocable trust is likely the right option. However, it’s important to keep in mind that a revocable trust doesn’t offer the same level of protection from creditors or estate taxes as an irrevocable trust.

When to Choose an Irrevocable Trust

An irrevocable trust may be the right choice if you have specific estate planning goals, such as protecting assets from creditors or reducing estate taxes. Because the assets in an irrevocable trust are no longer considered part of the grantor’s estate, this type of trust can provide significant benefits for those with substantial estates or those looking to safeguard their wealth.

Irrevocable trusts are also an excellent tool for Medicaid planning and other long-term financial strategies. However, the key downside is the lack of flexibility. Once you transfer assets into an irrevocable trust, you lose control over those assets, and the trust can’t be changed or revoked without the consent of the beneficiaries. 

Reach Out to Our Firm

Choosing between a revocable and an irrevocable trust is a significant decision in your estate planning journey. As experienced trust lawyers, we’re here to help guide you through the decision-making process and tailor a trust that aligns with your goals and needs. 

Sanders & Sanders, Attorneys at Law serves Upper Marlboro, Maryland, as well as Clinton, Maryland; Bowie, Maryland; Fort Washington, Maryland; Largo, Maryland; and Washington D.C. Get in touch today.