FAQ: Revocable Trust vs Irrevocable Trust
Updated: Apr 23
One of the more frequently asked questions we get is about the difference between revocable and irrevocable trusts. In this post, I answer that question as simply as I know how and suggest why someone might choose one over the other. As always, let us know if you have any questions. You can click HERE to schedule time to discuss.
People assume that the difference between a revocable trust and an irrevocable trust is that a revocable trust can be changed while an irrevocable trust cannot. This isn't quite right.
Both types of trusts can be changed. The question isn't whether the trust can be changed, but rather who can do the changing.
With a revocable trust, the grantor (a person who creates a trust and funds it with their own assets) can revoke, amend, and restate the trust as long as they are alive and have capacity.
Revocable trusts are used to avoid court-controlled processes, like guardianship and probate, and, if drafted properly, they can do a great job of providing ongoing asset protection for the grantor's beneficiaries, such as surviving spouses and children. To a lesser degree, revocable trusts can be useful in planning for tax efficiencies down the road.
With an irrevocable trust, the grantor cannot revoke, amend, or restate the trust once it is executed. That does not mean that it can't be changed. It just means the grantor isn't the one who can change it.
In Oklahoma, irrevocable trusts may be modified by the consent of all the parties, including the grantor. Irrevocable trusts can also be modified by a court, so long as the party petitioning for the modification can prove that the trust contains and error that misrepresents the grantor's intentions. There are other options, such as a procedure called "decanting," which allows for certain modifications of irrevocable trusts.
But by far our favorite way to modify an irrevocable trust is by appointing a trust protector. Trust protectors are independent parties named in a trust who have specifically delineated authorities to modify the trust for limited purposes - such as filling trustee vacancies, directing trust investments, modifying certain beneficial interests, and even amending the trust for tax purposes or other changes in the law. The great thing about trust protectors is that they may act even if the grantor is incapacitated or deceased (at which time modification by consent would be impossible), they do not have to rely on a mistake in order to modify the trust (the way a court would), and they don't have to change the situs of the trust and create a new trust (as in decanting).
Why Would Anyone Create an Irrevocable Trust?
Irrevocable trusts are used for asset protection, which can take several forms. Maybe you are trying to reduce the size of your taxable estate to save assets from federal and state estate and inheritance taxes. Maybe you are in a high liability industry and want to protect your assets from lawsuits and judgment creditors. Maybe you appreciate your privacy and want to protect your assets in other ways. And maybe you are trying to qualify for certain benefits, such as Medicaid or VA Aid & Attendance, and you want to protect certain assets from being spent-down for eligibility purposes.
A revocable trust cannot provide this kind of asset protection for the grantor. In order to get this type of benefit, your trust must be irrevocable.
Not all irrevocable trusts are the same. There is no "one size fits all" with this type of planning. Different types of trusts protect different types of assets. It is important not only to create an irrevocable trust, but also the right type of irrevocable trust.
Here's the stuff we always put at the end: If you want to know more, we would love to talk with you about it. Best part, the conversation about how it could benefit you doesn't cost anything. Call us at (918) 770-8940 or send an email to firstname.lastname@example.org to set up a free consultation.
Disclaimer: Reading this blog post does not create an attorney-client relationship, and it is not formal legal advice. This is for information purposes only. It is always best to speak with an attorney about your questions, assets, concerns, and needs.