Revocable vs. Irrevocable Trust Funds Explained

Revocable and irrevocable trusts both let you place assets in a trust to manage and eventually pass to your beneficiaries. The main difference is that you can generally change or cancel a revocable trust during your lifetime, while an irrevocable trust is usually more difficult to change. 

If you are considering a trust, you may be unsure which type gives you the right balance of control and long-term planning. You may want the freedom to change your plan later, or your goals may require giving up some control over the assets you place in the trust. 

At the Law Offices of Julie A. Schejbal, CHTD in Dunkirk, Maryland, we help individuals and families decide how trusts may fit into their estate plans. We can review your assets and goals, explain your options, and prepare a trust based on your decisions. Call us today to schedule a consultation. 

What Is a Revocable Trust?

A revocable trust is an estate planning arrangement that allows you to transfer assets, such as real estate or financial accounts, into a trust while generally retaining control over the property during your lifetime. If you name yourself as trustee, you continue managing the trust assets much as you did before transferring them. You may also add or remove assets and change the trust's terms, including its beneficiaries and instructions for distributing property. 

The person who creates the trust is called the settlor, also commonly referred to as the grantor. Under Maryland law, a settlor generally can amend or revoke a trust unless the trust document expressly states it is irrevocable. This rule does not apply to trusts created under instruments executed before January 1, 2015. 

A revocable trust can also provide a plan for managing the trust property if you can no longer manage it yourself. You can name a successor trustee to take over when the trust terms specify, such as if you become incapacitated. After your death, the successor trustee can manage and distribute the remaining trust assets to your beneficiaries according to the terms you established. 

What Is an Irrevocable Trust?

An irrevocable trust generally requires you to give up some control over the assets you transfer to it. Unlike a revocable trust, you usually cannot simply cancel the trust, take the assets back, or change its terms whenever you want. The rights you keep depend on how the trust is written. 

However, “irrevocable” does not mean the trust can never be changed. Maryland law allows certain irrevocable trusts to be modified or terminated when specific legal requirements are met. In some cases, a court may also modify a trust when circumstances the settlor did not anticipate would interfere with the trust's purpose. 

Before transferring assets to an irrevocable trust, you should understand what control you will give up and what rights you will keep. 

Can a Trust Help Your Assets Avoid Probate?

Yes. In Maryland, assets held in a living trust generally do not have to go through probate after your death. Instead, the trustee manages or distributes those assets according to the instructions in your trust. 

However, creating a trust alone is not enough. You must also transfer the assets you want the trust to hold. For example, you may need to change the ownership of a financial account or prepare a new deed to transfer real estate into the trust. This process is often called “funding” the trust. 

If an asset remains in your name when you die, it may still have to go through probate. An exception may apply if the asset already has another way to pass directly to someone, such as a beneficiary designation or right of survivorship. 

Do Revocable and Irrevocable Trusts Protect Assets From Creditors?

A revocable trust generally does not protect your assets from your own creditors. Under Maryland law, property in a revocable trust is subject to claims by the settlor's creditors during the settlor's lifetime. 

An irrevocable trust may provide different creditor protections, but simply transferring assets to one does not automatically protect them. If trust assets can still be distributed to or used for the settlor's benefit, Maryland law may allow the settlor's creditors to reach some of those assets. 

The amount of protection therefore depends on how the irrevocable trust is structured and what rights you keep after transferring your property to it. 

How Are Revocable and Irrevocable Trusts Taxed?

For federal income tax purposes, the IRS generally treats a revocable trust as a grantor trust. This means the grantor is treated as the owner for income tax purposes, and the trust's income and deductions generally belong to the grantor. 

The word “irrevocable” does not determine a trust's federal income tax treatment by itself. An irrevocable trust may be treated as a grantor, simple, or complex trust depending on its terms and the powers or benefits retained by the grantor. 

Other tax consequences can also depend on the trust's structure, the property transferred, and the rights retained. Therefore, don't assume that creating an irrevocable trust will automatically reduce taxes or remove property from your taxable estate. 

Which Type of Trust May Be Right for You?

A revocable trust may be appropriate if you want to keep control of your property and the ability to change your plan. It can also allow a successor trustee to manage trust property if you become unable to do so and can help properly funded assets pass outside probate after your death. 

An irrevocable trust may be appropriate when accomplishing a particular planning goal requires you to give up some control over the property. Depending on how the trust is structured, those goals may include managing assets for beneficiaries, addressing certain creditor concerns, or accomplishing specific tax or estate planning objectives. 

Choosing between them requires more than deciding whether you want a trust you can change. Consider what property you plan to transfer, how much control you want to keep, who should benefit from the trust, and what you want to happen to the property during your lifetime and after your death. 

Call Us for Legal Guidance on Revocable and Irrevocable Trusts

Revocable and irrevocable trusts serve different purposes. A revocable trust generally gives you more control and flexibility, while an irrevocable trust limits your ability to change the arrangement. These differences can affect probate planning, creditor rights, taxes, and how your beneficiaries manage your property. 

At the Law Offices of Julie A. Schejbal, CHTD, in Dunkirk, Maryland, our attorney Julie A. Schejbal helps clients throughout Calvert County, Prince George's County, Charles County, and St. Mary's County with trusts and other estate planning matters. We can review your circumstances, explain how different trust structures may affect your property, and help you prepare an estate plan based on your objectives. Contact us now to schedule a consultation.