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What is the Difference between a Revocable Trust and an Irrevocable Trust?

On Behalf of | May 24, 2015 | Uncategorized |

The phrase “Revocable Living Trust” has three parts that need to be discussed.

First, a “Trust” in this context is an arrangement between three parties: the Grantor (sometimes called “Settlor” or “Trustor”), the Trustee, and the beneficiary. The Trustee is the legal owner of the property, and manages the property according to the agreement entered into with the Grantor. The beneficiary is the person (or entity) that benefits from the trust property. A trust arrangement generally has different layers of trustees and beneficiaries. For example, Grantor sets up a trust with himself as trustee and initial beneficiary. However, when Grantor dies, his oldest child is the successor trustee, who must distribute the trust property in equal shares to each of his three children-the successor beneficiaries. Notice how a Trust isn’t really an entity, but rather an arrangement of ownership. However, in most instances, a trust is treated as an entity for tax and liability purposes.

Second, “Living” means that the trust was established during the lifetime of the grantor. The other option is to have the grantor’s will establish a Trust after the grantor dies (called a “testamentary trust”). Sometimes you will see the Latin phrase “inter vivos” (“revocable inter vivos trust”, or “inter vivos trust”). Inter Vivos means “living” in Latin.

“Revocable” means not only that the grantor can revoke the trust (and take the trust property back), but also means he can amend the trust. For example, Grantor settles a revocable living trust that holds his house, bank accounts, and investment accounts. He initially intended to have all of the property sold, and distributed in equal shares to his two children. However, twenty years down the road, one of his kids developed a drug problem, and so Grantor doesn’t want to give that child a substantial sum of money. Grantor amends the trust to give that child the right to live in his house for the child’s life (in order to make sure he is provided for), and then after that child dies, the house is to be sold and distributed to Grantor’s grandchildren.

Conversely, an “Irrevocable Trust” is a trust that cannot be revoked or amended by Grantor.

Why would anybody want to give up the right to revoke or amend their trust agreement with the trustee? For two main purposes: to move assets out of their taxable estate, and to remove assets from the reach of creditors. Irrevocable trusts are generally complex in nature due to the added purpose of tax minimization-the irrevocable trust must comply not only with state trust law, but with the Internal Revenue Code.