What’s the Difference Between a Revocable and Irrevocable Trust?

Alyssa Chance is an attorney and assistant director in Sophisticated Planning Strategies at Northwestern Mutual. 

Estate planning, at its heart, is about ensuring that your final wishes are followed after your death. The good news is that there are many different tools, strategies and legal concepts that can help you do this. Trusts, in particular, can be an important part of a comprehensive estate plan.  

But not all trusts are the same. Trusts come in two main categories: revocable and irrevocable—which are different in key ways.  

Below, we provide an overview of what trusts are and how they work before taking a closer look at both revocable and irrevocable trusts. We also offer some advantages and disadvantages of these two trusts. 

What are the basics of a trust? 

In most cases, when you get paid, open a savings account or buy a house or other property, these things are in your name. They’re part of what’s known as your estate. A trust is a legal structure designed to hold money or assets on behalf of someone—known as a beneficiary. Because you no longer technically own the assets held in certain trusts, these assets can avoid probate and may avoid estate taxes. 

Trusts work like this: the grantor funds the trust by transferring assets, which can include cash, stocks, bonds, real estate, property and other assets, into it. The grantor must also name both a beneficiary, who will receive those assets—either all at once or over time, and a trustee, who will oversee the administration of the trust. 

What is a revocable trust? 

A revocable trust is any trust that can be changed, adjusted or canceled (i.e., revoked) by the grantor after the trust has been established. This can include changes to the trust’s beneficiaries, the assets that the trust holds, and the terms of how and when the trust’s assets are transferred or distributed to its beneficiaries.  

The flexibility of a revocable trust provides peace of mind that you can adjust the trust as you age and as your and your beneficiaries’ life circumstances change. It is also what makes revocable trusts a good fit for many people. Revocable trusts are also called living trusts. 

Pros and cons of revocable trusts 

Before deciding to create a revocable trust, it’s first important to understand the benefits and drawbacks associated with it.  

Benefits of a revocable trust: 

• You can be the trustee: With a revocable trust, you as the grantor can name yourself trustee, allowing you to retain control over your assets during your lifetime. 

• You have the flexibility to make changes: As noted above, many aspects of a revocable trust can be adjusted after the trust has been created, allowing you to make changes as your life circumstances and those of your beneficiaries change. 

• The trust will bypass probate: Assets placed in a revocable trust bypass probate court upon your death. This allows your beneficiaries to receive their inheritances faster and with more privacy than probate court typically allows.  

• The trust can be managed continuously: As long as you have named either a successor trustee or a power of attorney, the trust can be continuously managed—even in the event that you are incapacitated.  

Drawbacks of a revocable trust: 

• You may still owe estate taxes: Assets held in a revocable trust are not shielded from estate taxes in the same way as assets held in an irrevocable trust. This means that if your estate will owe estate taxes, the trust won’t offer any protection against these taxes. 

• Assets in the trust aren’t protected: Assets held in a revocable trust are not protected from lawsuits or creditors while you are alive.   

What is an irrevocable trust? 

While there are ways to build flexibility into an irrevocable trust, typically these trusts cannot be changed or canceled once created. There are very specific circumstances when an irrevocable trust can possibly be changed. This includes instances when all of the parties (including all of the trust’s beneficiaries) agree to the change. The courts may also step in to adjust an irrevocable trust in some rare cases.  

Irrevocable trusts are particularly useful for shielding an estate against estate and income taxes, and they often form the basis for dynasty trusts, which are designed to pass wealth to multiple generations.  

Pros and cons of irrevocable trusts 

Just like revocable trusts, irrevocable trusts have their pros and cons, which you should be aware of before you add an irrevocable trust to your estate plan. 

Benefits of an irrevocable trust:  

• Assets in the trust are shielded from estate taxes: Assets held in a revocable trust are often exempt from estate taxes, often making them ideal for estates that expect to be subject to them. 

• Assets in the trust are protected: Because you are no longer the owner of the assets in an irrevocable trust, those assets are protected from both creditors as well as lawsuits. 

• The trust will bypass probate: As with a revocable trust, the assets held in an irrevocable trust do not need to go through probate upon your death.  

Drawbacks of an irrevocable trust:   

• You no longer own your assets: Unlike with a revocable trust, the grantor of an irrevocable trust cannot also be its trustee. This means that you must give up control of the assets when creating an irrevocable trust.  

• It’s nearly impossible to make changes: Except for very narrow circumstances, it is impossible to make changes to an irrevocable trust once it has been established, even if your financial circumstances or those of your beneficiaries change.  

• There may be higher income taxes: If an irrevocable trust earns income, it will be subject to an income tax. Importantly, tax brackets for trusts are much lower for trusts than tax brackets for individuals, which can lead to a high income tax burden. For 2024, a trust has to earn only $14,451 or more in order to be in the highest tax bracket (37 percent). 

• They’re complex: While all trusts are complicated to establish, irrevocable trusts are especially so, requiring a lawyer and potentially significant legal fees. 

Who should us an irrevocable trust vs. a revocable trust? 

Despite the differences described above, both revocable and irrevocable trusts have their role to play in estate planning. Which is right for you will depend on your financial situation, your heirs’ financial situations and the specific goals for establishing a trust.  

Many people establish trusts in the event of an untimely death. So, if you make the smart decision to purchase life insurance, you may want to build a trust that’s activated when you and your spouse die. This allows you to put some guardrails around how your children get money that you’d leave behind for them. Without one, they get all of the money at the age of majority (age 18 in most states). 

If you have significant assets that would be subject to estate taxes upon your death, an irrevocable trust can help you minimize some of this tax burden. And if you believe your assets may be targeted by creditors or during a divorce or other legal proceeding, an irrevocable trust can provide a layer of protection against seizure.  

If, on the other hand, you’d like to maintain greater control over the trust during your lifetime—including the ability to make changes to the trust’s beneficiaries, terms and assets—then a revocable trust may be a better fit.  

Your financial advisor can help you weigh your options and understand what role both revocable and irrevocable trusts might play in your broader estate plan.