What is the difference between a revocable and irrevocable trust?

As a lawyer, I can explain the key differences between revocable and irrevocable trusts.

A revocable trust, also known as a living trust, is a legal arrangement where the person who creates the trust (known as the grantor or settlor) retains ownership and control of the assets placed in the trust during their lifetime. The trust can be amended or revoked at any time during the grantor's lifetime. Upon the grantor's death, the assets in the trust are distributed according to the trust's instructions or as directed by the grantor's will.

An irrevocable trust, on the other hand, is a legal arrangement where the grantor transfers ownership and control of assets to the trust, and gives up their ability to modify or revoke the trust. Once the assets are transferred into the trust, they are no longer owned by the grantor and the grantor generally cannot access or control them. The trust has its own tax ID number and files its own tax returns, and any income or capital gains earned by the trust are taxed separately from the grantor's personal income.

There are several reasons why a person might choose one type of trust over the other. A revocable trust can be a useful tool for estate planning, as it allows the grantor to maintain control of their assets during their lifetime while still providing for their loved ones after they pass away. It can also help avoid probate, as assets in the trust are not subject to the court process of distributing a will.

An irrevocable trust, on the other hand, can offer more protection and flexibility in certain situations. For example, assets placed in an irrevocable trust are generally protected from creditors and lawsuits, as they are no longer considered part of the grantor's estate. An irrevocable trust can also be used to transfer wealth to future generations while minimizing estate and gift taxes.

It's important to note that while irrevocable trusts offer some advantages, they also come with some potential downsides. Most notably, once assets are placed in an irrevocable trust, they cannot be taken out except as directed by the trust documents. This can be problematic if the grantor's financial situation changes or if they need access to the assets in the trust later in life. Additionally, the grantor loses control over the assets in the trust, which can be difficult for some people to accept.

In general, deciding between a revocable and irrevocable trust requires careful consideration of the individual's financial and personal circumstances. It's important to consult with a qualified attorney to determine which type of trust is best suited for your situation.