Revocable vs. Irrevocable Trusts: What You May Not Know

When deciding between a revocable vs. irrevocable trust, you should consider your net worth and what type of tax shelter your heirs may need.

Although it may be tempting to set up a will and consider your estate planning complete, trusts are critical for organizing how your assets are distributed during your lifetime and after death.

Both types of trusts have pros and cons that can significantly affect your estate and beneficiaries.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

If you worry that a more sophisticated plan involving trusts only belongs in the heady realm of estate planning for millionaires, think again. There are plenty of ways to save money on estate plans including irrevocable trusts and ones with other bells and whistles.

Revocable vs. irrevocable trust

How do you decide which trust is best for you and your family? Both types avoid the dreaded probate process when a court manages the distribution of your assets after death.

Probate can be costly, lengthy and public. Both types also require a trustee to manage the trust, a legal entity that governs the treatment of your real estate, investments, cash, and other assets.

The type of trust to set up comes down to what you wish to accomplish.

Revocable trust: the people’s choice

As its name suggests, a revocable trust, also called a revocable living trust, gives you the right to make changes to or terminate the trust in your lifetime.

Its biggest feature is the flexibility and control it gives the grantor — or you, the asset owner. The biggest drawback is that assets in the trust are still counted towards income and estate taxes. It also is not protected from creditors, legal judgments, liens and other obligations.

“To choose between a revocable or irrevocable trust will be based on their needs. If they want to maintain control of their assets, and they need those assets during their lifetime, then they would use a revocable trust,” said Lee McGowan, president of Monument Group Wealth Advisors in Concord Mass., which manages $550 million in assets.

Most people choose to set up revocable trusts unless they are high-net-worth individuals seeking to maximize their estate and gift tax exemption, said Betty Wang, president of BW Financial Planning in Denver.

For 2025, assets up to $13.99 million per person ($27.98 million for a married couple) are exempt from federal estate and gift taxes. So, if a person’s estate is worth $20 million, they might choose to put $7 million in an irrevocable trust.

The remaining $13 million can be held in a revocable trust and is exempt from federal estate and gift taxes since it falls under the cap. However, they still have to pay income taxes on it. (Currently, 12 states and the District of Columbia also levy estate taxes.)

Typically, the owner or grantor is also the trustee of the revocable trust, although others can also be trustees. A married couple can be co-trustees so that when one spouse becomes incapacitated or dies, the other can carry on. When both have died, the trust becomes an irrevocable trust.

Irrevocable trust: is it really a tax shelter?

An irrevocable trust is one in which the grantor gives up the ability to control or benefit from the trust assets once the trust is set up.

People choose this type of trust if they have a specific purpose for the funds, such as controlling the payout to beneficiaries, designating the funds for a purpose, and protecting assets from liens, legal judgments, creditors, divorces and other obligations.

Due to state law changes in past years, it has become easier to change irrevocable trusts. “It’s a bit of a misnomer that an irrevocable trust can’t ever be changed,” McGowan said. “You can — it depends on the situation.”

One way is the designation of an independent trustee to make changes consistent with the grantor’s wishes. Another way is to give a beneficiary the power to appoint or redesignate the recipient of trust assets.

The court also can order changes to a trust — or trustees can do what’s called “decanting,” moving assets from an old trust to a new one with better terms and conditions, as long as the changes are reasonably consistent with the original intent of the trust, McGowan said.

An attractive benefit of an irrevocable trust is that the grantor does not pay taxes on it; the trust can pay its own taxes without distributing its income.

Alternatively, the trust can choose to give the income to beneficiaries, who will be the ones to pay taxes. This might be a better option if the beneficiaries fall into a lower tax bracket.

That’s because the taxes levied on the trust can be at par with the highest income tax rates.

Within the trust, any ordinary income above $15,200 falls into the 37% marginal tax bracket, said Roger Stinnett, managing member of Stinnett Wealth Planning in Seal Beach, Calif. In contrast, the 37% rate doesn’t kick in for income taxes until $626,350 for a single taxpayer or $751,600 for joint filers in 2025.

Nevertheless, Stinnett sees a rush of people setting up irrevocable trusts by 2026, when the $13.99 million estate tax exemption (up from $13.6 million in 2024) will be cut roughly in half. That means they have less than two years to create and fund these trusts.

Revocable or irrevocable trust: which one to use?

Whether to use a revocable trust or an irrevocable trust depends on what you are trying to achieve.

If you want to protect assets and aren’t sure about your beneficiary then a revocable trust may be the right choice.

You have control over the assets while you are alive and can easily change your mind. But you don’t get a tax break with a revocable trust.

An irrevocable trust, on the other hand, may be the better choice if your priority is reducing taxes and protecting assets. By transferring assets into an irrevocable trust, you remove them from your taxable estate, protect them from creditors and ensure they go to your chosen beneficiaries.

Keep in mind you give up control, so it's important to be certain about your decisions before setting one up.

Related trusts

Beneficiaries with disabilities may need another type of trust, which can be revocable or irrevocable. These trusts provide for disabled beneficiaries without jeopardizing their government benefits.

Business trusts can help protect assets within LLCs, among others.

Life insurance trusts, which hold proceeds from insurance policies, are also fairly common but are irrevocable.

States with the most favorable trust laws

A trust created in one state is valid in all other states. However, each state has its own rules that apply to trusts.

You can set up a trust in any state in which you have sufficient connections, such as having a vacation home in that state.

In general, look at each state’s tax treatment of trusts, asset and creditor protection, privacy and modification rules.

The best states for trusts are Nevada, South Dakota, Delaware, Alaska and Wyoming, according to U.S. Bank.

They do not charge state income taxes, offer perpetual trusts that are passed down through generations indefinitely, provide asset protection and flexible decanting.

However, if the trust elects to shift the tax burden to beneficiaries, these favorable tax laws will be moot if beneficiaries don’t live in these states.

Read More

• Estate Planning for Women: Married, Single or Divorced
• 13 Smart Estate Planning Moves
• Common Estate Planning Mistakes
• Seven Things You Should Leave Out of Your Will, According to Experts