There is a great deal of confusion about trusts, so I thought it would be helpful to teach you about the two broad categories (Revocable and Irrevocable) and how they differ (and relate) to one another.

First off, regardless of the type of trust, there are three roles involved in a trust agreement:

The Trustee - the manager of the trust (aka legal title holder)
The Grantor - the creator of the trust (sometimes referred to as the “Donor” or “Settlor”)
The Beneficiary - the person who reaps the financial benefits of the trust (i.e., the intended recipient)

A trust can have one or more trustees, grantors, and/or beneficiaries. For example, a married couple may choose to create a joint trust with both of them named as the grantors, co-trustees, and beneficiaries (for life) with their children being the equal remainder beneficiaries and successor co-trustees after the death of the surviving spouse.

Alternatively, a trust can be created by one individual (i.e., one grantor), but may appoint multiple co-trustees to serve concurrently with the grantor while living or succeed the grantor upon his/her passing for a seamless transition of wealth.

Now that you have some background on trusts, let’s dive into the differences between a revocable living trust and an irrevocable living trust.

On a side note: when you see the word “living” that just means the trust was created during the grantor’s life (as opposed to a “testamentary” trust, which means it was created after death).

What are the differences between a Revocable Living Trust and Irrevocable Living Trust?

A Revocable Living Trust can be changed at ANY time during the grantor’s life as long as the grantor is of sound mind - meaning that they are not deemed “legally incapacitated” and therefore are able to sign legal documents. The definition of legal incapacity can vary slightly by document so always be sure to check the definitions section of the trust to make sure it aligns with your intention. When a term is not defined within a trust document, you should look to state statute (like the MUTC in Massachusetts) for clarification.

The ability to change, amend, or revoke a revocable trust is why it is called REvocable (as opposed to IRrevocable). Please keep in mind that if you set up a joint trust with your spouse, there may be a restrictions stating that you cannot revoke or amend the trust without your spouse’s consent. This can be a problem if you need to update the trust after the death of the first spouse because of a change in family dynamics or for other asset protection purposes.

As stated in the example in the beginning of this article, it is typical for grantors of revocable living trusts to name themselves as the initial trustees so long as they are competent to perform such role. This means you would have full operating control over the trust to sign legal documents on behalf of the trust, manage the property of the trust, and make distributions accordingly. In other words, with most revocable trusts, your life would continue on as usual with no noticeable difference to you - the trust’s purpose would only become clear if/when you become incapacitated or after your death.

With irrevocable living trusts, who can serve as trustee is much different. Whether you are creating an irrevocable trust to save on estate taxes or protect assets from the nursing home, you generally should not serve as the trustee. You may also not want to have your spouse serve as trustee depending on the circumstances or else the trust could be broken/compromised.

For irrevocable trusts, you generally see adult children serving as trustees in addition to an independent (i.e. non-beneficiary/subordinate) co-trustee to serve with the adult child in order to perform certain restricted acts or act as a check and balance.

Given the disconnect of control between grantors and trustees of the typical irrevocable living trust, you have to be extremely careful in selecting your trustees. Certain kids just aren’t cut out for the role and even someone as competent as your CPA may not perform the role in the manner or with the speed that you expect of a trustee. Fortunately, many irrevocable trusts do allow the grantor to remove and replace a trustee at any point in time (without court intervention), so you can rely on this fail-safe in case things get out of hand (such removal option is also nice to have just for peace of mind).

Regardless of whether your have a revocable living trust or irrevocable living trust, if you have more than two trustees (i.e., co-trustees), then you should understand whether the co-trustees must act jointly and unanimously or whether they can act independently. If they have to act jointly, then you should have instruction as to what happens if the trustees cannot come to an agreement (e.g., insert some sort of “tie-breaker” clause).

The difference in beneficiaries of a revocable trust vs. an irrevocable trust is where things get interesting.

For example, virtually all the revocable trusts that I’ve drafted have the grantor as the beneficiary so he/she can control the assets just as he/she would if they were held in his/her name individually. In other words, with a revocable trust, during the term of the grantor’s life, you almost never see anyone other than the grantor also being the initial beneficiary. And if the grantor is serving as trustee, but becomes incapacitated, then the revocable trust is typically designed so that the successor trustee has to use the trust assets for the exclusive benefit of the grantor so long as he/she is living.

But with irrevocable trusts it’s much different.

For example, with irrevocable trusts designed to protect the principal of the trust from claims against the grantor (e.g., creditors/bankruptcy/divorce/long term care, etc.) the trust may intentionally be designed to cut the grantor off from access to the principal of the trust (including the inability to borrow from the trust or substitute property from the trust in certain circumstances). If the grantor has no rights or legal access to the principal of the trust, then it can be argued that the creditor’s of the grantor cannot attach the property. Please note: you can not do a transfer to this type of irrevocable trust if you are already in a legal predicament or think one is imminent - that would generally be considered a fraudulent conveyance which is what we in the business call a “no-no.”

However, even though an irrevocable trust may cut off the grantor from access to principal, it could allow the grantor the right to income (e.g., rents, interest, dividends, etc.) so long as the grantor understands that such right to income means the income is not protected.

It can be very complicated whether or not property in an irrevocable trust is counted as part of the grantor’s gross estate for tax purposes. The general rule of thumb is that if a grantor retains any control over the use or enjoyment of the property held in an irrevocable trust, then it is included in his/her estate for estate tax purposes. With a revocable trust, this estate tax optionality does not exist (although there are techniques for married couples that would minimize/defer such estate taxes for revocable living trusts if set up correctly).

If your head is starting to spin, I have some good news - regardless of whether you do a revocable living trust or an irrevocable living trust, they both avoid probate (if set up correctly). So, when you are thinking about whether an irrevocable living trust vs. a revocable living trust makes sense to you, you can cross off the comparison of probate and just focus on estate taxes and asset protection as the two primary determinants.

Why would I need to make changes to my trust?

Knowing that a Revocable Trust can be flexible, there are key times when changes should be made:

Marriage
Divorce
Birth or adoption of a child
Death of a beneficiary
Purchasing or selling property
Falling out with beneficiary (or spouse of that beneficiary)
Additional control needed (e.g., adding asset protection provision for child that has developed a disability or has substance abuse or gambling concerns)

5 Questions to think about when deciding on what type of Trust is right for you

How much control are you willing to give up?
What is your primary objective with respect to you estate plan?
Do you have the right people in place to serve as trustees? Competent, organized, and of course, absolutely trustworthy.
How stable/predictable is your asset mix and family dynamic?
Do you have a crystal ball? (this one would be particularly helpful for the irrevocable trust)

Most clients tend to go with a revocable trust (and that is my preference) since question number 5 really throws people for a loop. If you’d like to explore your options further, then you should speak with an experienced estate planning attorney.