There are important differences between revocable and irrevocable trusts. Knowing the differences will help in deciding the type of trust that works best for your situation. Some of the most important differences between revocable and irrevocable trusts are as follows:
• Revocable trust
o Ownership of assets – Settlor retains ownership of trust assets in a revocable trust.
o Transferring assets – Easy to transfer assets in and out of a revocable trust.
o Changing beneficiaries – Can easily change beneficiaries in a revocable trust.
o Amendments – Can easily amend or otherwise modify a revocable trust.
o Revoke – Can change or cancel a revocable trust at any time.
o Taxes – Taxes on income from assets in a revocable trust are reported on the settlor’s personal tax return.
o Asset protection – Assets are not protected from settlor’s creditors in a revocable trust since the assets are considered owned by the settlor.
• Irrevocable trust
o Ownership of assets – Settlor does not retain ownership of trust assets in an irrevocable trust, instead, trust assets are transferred to the trust.
o Transferring assets – Easy to transfer assets into an irrevocable trust but can be difficult to transfer them out of an irrevocable trust.
o Changing beneficiaries – Generally, you cannot change beneficiaries in an irrevocable trust with few exceptions. The trust can allow for the change of beneficiaries by having a provision that addresses such changes or you can petition a court to change the beneficiaries.
o Amendments – Difficult to amend. Generally cannot amend an irrevocable trust without approval of the trustee and beneficiaries or court order.
o Revoke – Settlor cannot unilaterally cancel or change an irrevocable trust.
o Taxes – Taxes due on trust assets in an irrevocable trust are the responsibility of the trust. Irrevocable trust files its own tax return.
o Asset protection – Assets are more protected from settlor’s creditors in an irrevocable trust.
Revocable trusts are much more popular than irrevocable trusts because they are less expensive and easier to use. However, irrevocable trusts can make sense to use if you need asset protection, you have a very high net worth and you need to minimize tax liability, or you want to qualify for certain government benefits.