When putting together an estate plan that makes use of at least one living trust, it is important to understand the difference between an irrevocable living trust and a revocable living trust. The most basic and self-evident difference between the two is that an irrevocable trust cannot be revoked. There are, however, significant differences between the legal and tax consequences of the two devices of which one should be aware.
What are the differences in revocability?
To say that the difference in revocability between a revocable and irrevocable trust is that one cannot be revoked is accurate, but not a complete picture. Yes, an irrevocable trust cannot be revoked after the trust agreement has been signed, but that does not mean that a revocable trust never becomes irrevocable. In fact, many revocable living trusts become irrevocable upon the death of the trustor (i.e., the trust’s creator).
Do the two differ in purpose?
Yes, the purposes for which the two types of trusts are used do differ. The irrevocable living trust is most often used for the transfer of wealth, the protection of assets, or to reduce one’s estate tax liability. The revocable living trust, however, does not provide any reduction in one’s estate tax liability; any assets held by the trust at the settlor’s death will count as part of his or her estate and be subject to both state and federal estate taxes. Instead, the revocable trust is used to plan for mental disability, to avoid the cost and expense of probate, and to protect the privacy of the parties involved.
There are many factors that need to be evaluated in designing an estate plan that best fits your needs and goals. The best way to ensure that you get a properly designed plan is to work with an experienced and qualified estate planning attorney.