Ask the Expert: What’s the Difference Between a Revocable and Irrevocable Trust?
Each week our Northwestern Mutual experts answer your questions. This week’s question:
What’s the difference between a revocable and irrevocable trust?
“I” and “R.”
Actually, as the names imply, the main difference between the two is that one can be revoked, or terminated, by the person who set it up (the grantor), and the other cannot. Revocable trusts are usually designed to avoid the cost and publicity of the state probate process, and irrevocable trusts are usually put in place to also keep trust assets out of the grantor’s taxable estate for estate tax purposes.
Trusts that are revocable will usually also have provisions whereby the terms of the trust can be amended by the grantor; amendment is usually preferred to revocation (and starting over) if the purpose of the trust or other circumstances have changed. If a trust is revoked, any assets held in the trust’s name will be distributed based on the terms of the trust, which usually means they will revert back to the grantor.
The grantor of an irrevocable trust will usually not have the ability to amend the trust once it is set up.
If the grantor of a revocable trust dies or becomes mentally incapacitated while the trust is still in existence, that trust will usually become irrevocable at that point.
- Related: Download Northwestern Mutual’s Free Guide: Your Estate Plan: Is a Trust Right for You?
You may have noticed that I’m overusing the word “usually”—that is on purpose. A trust is a document meant to guide a trustee in carrying out the wishes of the grantor, and trust terms can vary widely based on what any particular grantor is trying to accomplish.
Usually, an irrevocable trust is set up to provide transfer (gift and estate) tax benefits, as well as protection for beneficiaries either from themselves or creditors. Revocable trusts are usually designed to avoid probate (a public process to pass what you leave behind to your heirs), provide for smoother administration upon a grantor’s death or disability and provide additional family privacy.
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