Irrevocable Trust Vs. Revocable Trust

What is the difference between a revocable trust and an irrevocable trust? The difference is right in the name; one is revocable. It is changeable; you can amend it, you can tear it up anytime you want to.  One is permanent; it’s irrevocable.

Irrevocable Trusts

An irrevocable trust is a will replacement. We create an irrevocable trust instead of a will document to decide where our estate will go. Anything we get into the private family entity, or the trust, will be controlled by a private family agreement, and by virtue of that, we don’t have to go to court. Wills go to court, but revocable trusts and anything in the trust doesn’t need a judge’s help. That’s why we do a revocable trust you can change it, you can amend it, you can tear it up.

Reason One For An Irrevocable Trust

People use irrevocable trusts in very specific circumstances. It’s very rare for most estates to need an irrevocable trust as part of the estate planning.  However, some situations call for irrevocable trusts. First, I want to protect one of my kids or another beneficiary from themselves. When I die, it will find an irrevocable trust that helps them. They can give them money for certain expenses, it can hold on to it until a certain age, but in the meantime, it’s not theirs. It’s its own thing. So they get sued, declare bankruptcy, get divorced, etc. It’s not theirs. They can’t lose it.

Reason Two For An Irrevocable Trust

Another example is if I don’t want to own something at some force anymore for some reason, often due to like estate tax issues. So I don’t want something to be included in my state when I die, so I’m going to gift this to this other thing, this other legal entity, and it’s going to hold it for someone else. Someday, but in the meantime, it’s not mine so that it wouldn’t be taxed. This is a permanent transfer; it is no longer mine. If I do it, it’s not a fake transfer. It is really not mine. I don’t want this money anymore. I don’t want it to be taxed. I have enough money. I’m giving it away now. Life insurance policies we do this sometimes to keep that life insurance money from being in an estate.

Reason Three For An Irrevocable Trust

The third one and the one that I see the most often is we have a special needs child, and we don’t again. The big thing about irrevocable trusts is the person for whom it is for the beneficiary. It’s not technically theirs. So, it doesn’t affect them for tax reasons or responsibility reasons or creditor reasons or whatever. So take a special needs child, and instead of me giving them an inheritance, which will cause them to lose state benefits. I’m instead going to put this into its own separate thing its own separate legal thing. I trust they will continue to receive those benefits. If they need something to supplement their life, this money can be paid out directly to vendors to upgrade their life and pay for some of life’s expenses without messing up those benefits again. They don’t technically own the money. So it’s done properly. It’s a shield.