Estate planning isn’t just about who gets what when you’re gone. It’s about the ability to control the distribution of your assets, protecting your estate and loved ones, and giving you and your family peace of mind while you’re living as well as when you’re no longer here. And when it comes to choosing between a revocable trust and an irrevocable trust, the stakes are deeply personal. Whether you’re protecting assets from future liabilities, planning for your children, or trying to avoid the probate process, knowing the difference between these two types of trusts is key. And finding the right DIY platform or an experienced estate planning attorney will help you navigate the variances in setting up each type of trust. But how is setting up a revocable trust different than setting up an irrevocable trust? And, how do I know which type of trust is right for me? Let’s answer your questions by breaking down what each trust accomplishes and how to know which one might be right for you.
What is a revocable trust?
A revocable trust, sometimes called a living trust, is just what it sounds like: a trust you can revoke or change at any time, as long as you’re alive and mentally competent. You can move assets in or out, change your beneficiaries, or even dissolve the trust altogether if life takes a turn. The flexibility of a revocable trust makes it popular for individuals who want control over their assets throughout their lifetime. You typically act as the trustee, or if you have a spouse, you might both be co-trustees. This means you’re in charge of managing the trust’s assets. If something happens to you, a successor trustee steps in to carry out your wishes.
What Is an Irrevocable Trust?
An irrevocable trust is the more buttoned-up sibling in the trust family. Once you set it up and fund it, it’s mostly locked in. You give up ownership and control of the assets placed in the trust, and changes usually require court approval or consent from all beneficiaries. That might sound like a bad deal at first, but the trade-off is powerful. Because the assets are no longer yours, they’re generally protected from lawsuits, creditors, and estate taxes if the trust is drafted correctly. In other words, an irrevocable trust can be a key tool for asset protection, Medicaid planning, and tax reduction.
It’s important to know, however, that protection from creditors depends on specific state laws. Trusts can be voided if it is found to have been a fraudulent transfer. Irrevocable trusts come in many forms, including life insurance trusts, special needs trusts, and charitable remainder trusts. Each type is designed for a specific purpose. And while they may not offer the same flexibility as revocable trusts, they open doors to benefits that the more flexible options simply can’t provide.
Both trusts help your estate avoid probate
One of the biggest perks of having either a revocable trust or an irrevocable trust is the ability to avoid probate. What is probate? Probate is the legal process that takes place after someone passes away. It involves proving that a will (if there is one) is valid, identifying and inventorying the person’s assets, paying off debts and taxes, and then distributing what’s left to the rightful heirs. Sounds straightforward, but in practice, probate can be slow, expensive, and very public.
Court supervision means paperwork, legal fees, and potentially months or even years before loved ones receive what was intended for them. One of the biggest reasons for trust creation is to help their family sidestep the probate process, ensuring assets pass quickly and privately to beneficiaries. Assets held in a trust pass directly to your beneficiaries when you die, skipping the often slow, costly, and public probate process. But remember, in a revocable trust, because you retain control, the assets are still considered part of your taxable estate and remain accessible to creditors during your lifetime. That is an apparent downside to revocable trusts.
Key differences between revocable and irrevocable trusts
You might be wondering which type of trust is right for you. This all depends on what matters most to you in your estate plan. Let’s look at the major differences between revocable and irrevocable trusts.
- Control vs. Protection: A revocable trust lets you call the shots. You can manage, amend, and dissolve it whenever it suits you. With an irrevocable trust, you’re essentially placing your assets in a lock box and handing someone else the key. There are some situations where you might be able to request limited control, but generally, control is conceded in this type of trust. Giving up control, though, does generally allow you to shield your assets from lawsuits and taxes.
- Probate Avoidance: Both revocable and irrevocable trusts avoid probate, assuming assets are properly titled in the trust at death.
- Tax Treatment: Assets in a revocable trust are still part of your estate and subject to estate taxes. Irrevocable trusts, when properly structured, remove assets from your estate, potentially lowering estate taxes.
- Asset Protection: Depending on state law, irrevocable trusts can offer stronger protection from creditors, divorce, and lawsuits, which is a major reason high-net-worth individuals and business owners often choose them.
Who should consider a revocable trust?
If you’re looking for flexibility and want to keep managing your assets during your lifetime, a revocable trust is likely the better fit. It’s a great option if your goals are:
- Avoiding probate for your family
- Keeping your estate private
- Planning for incapacity
- Simplifying the transition of assets at death
It’s especially common for parents with minor children or those with blended families to use revocable trusts to provide clarity and guidance after they’re gone. But remember, it won’t protect your assets from creditors, lawsuits, or long-term care costs which brings us to the next category.
Who should consider an irrevocable trust?
Irrevocable trusts are ideal for people with more specific or complex goals, such as:
- Reducing estate taxes
- Protecting assets from creditors
- Qualifying for Medicaid or other government benefits
- Providing for a child with special needs
- Making charitable gifts while retaining income
If you’re in a high-risk profession like doctors, lawyers, or business owners, an irrevocable trust may offer peace of mind that your hard-earned assets are safe from lawsuits. Similarly, if you’re facing long-term care costs, you should shift assets to an irrevocable trust well in advance for qualification and eligibility purposes. Medicaid has a look-back period, which is often 5 years.
How to set up a revocable trust
Setting up a revocable living trust is typically straightforward, especially with help from an estate planning attorney. First, you’ll work with your attorney to draft the trust agreement, which lays out who you are (the grantor), who will manage the trust (the trustee), who will receive the assets (your beneficiaries), and what happens if you become incapacitated or pass away. You will likely be the trustee while you’re alive. As we discussed above, a revocable trust is flexible, allowing you to revoke or amend it anytime while you’re alive and mentally competent.
Once the document is signed and notarized, the next, and often most overlooked, step is funding the trust. That means retitling your assets, such as bank accounts, real estate, or brokerage accounts, into the name of the trust. If your home is going into the trust, that often involves signing and recording a new deed. If you don’t properly fund the trust, it won’t serve its purpose of avoiding probate. This is a critical point! The trust document itself doesn’t control your assets unless you’ve legally moved them into the trust’s name.
States vary on what steps are required during the execution process, with some requiring notarization and witnesses. Having an attorney who knows your local state laws will be invaluable in the trust creation process.
How to set up an irrevocable trust
An irrevocable trust requires more planning and, in many cases, a little more courage. This is because once it’s signed and funded, you generally can’t take it back. Like with a revocable trust, you’ll start by working with an estate planning attorney to create the trust agreement. But this time, you’re giving up ownership and control over whatever you put inside it. That’s what makes irrevocable trusts powerful tools for asset protection, tax planning, or Medicaid eligibility, but also why they come with more serious long-term consequences.
Once the trust document is finalized, you must transfer ownership of your chosen assets into the trust. This can include property, cash, investments, life insurance policies, and business interests. Because you no longer own these assets directly, they may be shielded from lawsuits or estate taxes, but only if the trust is drafted and funded properly, and in accordance with your state’s laws. Depending on the type of irrevocable trust, you may also need to obtain a separate tax ID number from the IRS and file an annual tax return for the trust. It’s also worth noting that some states, like New York or California, have stricter rules around certain irrevocable trust structures, especially those used for Medicaid or income tax planning. Again, this is where a knowledgeable attorney makes all the difference.
State-by-state nuance: it matters where you live
Here’s the kicker: not all trust laws are created equal. State laws can impact how trusts are formed, taxed, and enforced. This is especially true when it comes to asset protection. For example, Florida and Texas are generally favorable toward asset protection trusts, while California tends to be more restrictive. Some states have passed Domestic Asset Protection Trust (DAPT) statutes that allow you to be both the grantor and beneficiary of an irrevocable trust, while others, like New York, do not. This is why it’s so important to work with a trust attorney who understands your state’s laws. A cookie-cutter approach might sound appealing and less expensive, but it can cause serious issues later if your trust doesn’t comply with local legal requirements.
What does it cost to set up a trust?
Like most things in life, it depends and it varies. On average, a revocable trust generally costs between $1,500 and $3,000 to set up, depending on complexity and your location. Irrevocable trusts, especially those with more sophisticated tax or asset protection planning, can range from $3,000 to $10,000 or more. It’s tempting to go the DIY route, especially with so many online tools available. But if your trust isn’t drafted correctly according to your state’s laws, or if you fail to fund it properly by retitling assets into the trust, it could be useless when it matters most. If you choose to use a DIY trust creation platform, make sure that it offers attorney reviews of your trust and state-specific trust creation, as this can be a great middle ground. And don’t forget the most important step: fund your trust!
Final thoughts on the differences between setting up a revocable trust and setting up an irrevocable trust
At this point, you have a better understanding of the differences between revocable and irrevocable trusts. And you know that it takes a bit more time and courage to set up an irrevocable trust, but that the benefits might be worth it depending on your needs. Choosing between a revocable and irrevocable trust isn’t just a legal decision; it’s a personal one. Ask yourself what you value most when it comes to flexibility, protection, tax savings, and legacy. And no matter which route you take, the most important thing is making a decision that reflects your goals, your family, and your future.
Originally from Memphis, Tennessee, Natori Arrindell is an experienced attorney specializing in family law, prenuptial agreements, and business law. With a dedicated practice serving individuals, families, entrepreneurs, and business owners, Natori is committed to providing comprehensive legal services to clients navigating the complexities of personal and professional relationships.
As a skilled negotiator and litigator, Natori is adept at guiding clients through challenging family-related legal issues with empathy and efficiency. Natori is also experienced in drafting, negotiating, and enforcing prenuptial agreements. By providing thoughtful guidance and facilitating open communication, she helps couples establish clear expectations and protect their assets before marriage. With a focus on preserving harmony and financial security, Natori ensures that clients enter into marriage with confidence and peace of mind.
On the business side, Natori offers comprehensive legal services to entrepreneurs and business owners. From drafting and negotiating contracts to advising on business formation and corporate governance, she serves as a trusted legal partner throughout all stages of business development. With Natori by their side, clients can navigate the complexities of the legal system with confidence and clarity.
When she’s not advocating for clients, Natori enjoys spending time with her 2 daughters.
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