Revocable Trusts
A Revocable Trust (also referred to as a Revocable Living Trust) is a type of Trust in which the Grantor retains the right during his/her lifetime to amend, change, revoke or terminate the Trust within his/her sole discretion. The assets funded into a Revocable Trust will still be considered the Grantor's own personal assets for creditor and estate tax purposes. Therefore, it offers no credit protection from legal judgments and all assets held in the name of the Trust at the time of the Trustor's death will be subject to both state and federal estate taxes.
A typical Revocable Living Trust becomes irrevocable when the Grantor dies, and can also be designed to break into separate Irrevocable Trusts for the benefit of a surviving spouse, or into multiple Irrevocable Lifetime Trusts for the benefit of children or other Beneficiaries.
Irrevocable Trusts
An Irrevocable Trust cannot be altered, changed, modified or revoked after its creation (absent extreme extenuating circumstances). Once a Grantor transfers property to an Irrevocable Trust, the Grantor can no longer take the property back from the Trust.
Though, by design, an Irrevocable Trust cannot be changed, there are certain exceptions that allow Beneficiaries or the Trustee to modify the Trust. One example is when an estate plan includes a Trust Protector who can look over the trust details to make changes. In addition, if the assets in a Trust are sold, the Trust is terminated.
Irrevocable Trusts come in two forms: Living Irrevocable Trusts and Testamentary Irrevocable Trusts. A Revocable Trust generally becomes an Irrevocable Trust after the Grantor dies.
Tax Issues
Federal Gift and Estate Tax:
Although a Trust is a separate legal entity, it may or may not be treated as a separate entity for transfer tax purposes. The distinction is often based on whether the Trust is revocable or irrevocable.
A Revocable Trust is treated as if the Grantor is the owner and is included in the Grantor's taxable estate when he dies. Transfers from the Grantor to the Revocable Trust are not treated as gifts or bequests. Transfers from the Trust to anyone else will be treated as a gift or bequest from the Grantor at the time of the distribution. When a revocable trust becomes irrevocable, then a gift or estate transfer occurs at the time it becomes irrevocable.
The assets in an Irrevocable Trust are not included in the Grantor's estate, unless the Grantor has retained certain powers over those assets. Transfers to the Trust during life are treated as gifts to the Trust. The Trust then stands as a separate taxable entity and pays taxes on its accumulated income. Transfers made upon death are treated as bequests. Gifts to an Irrevocable Trust are treated as gifts to the Trust Beneficiaries.
Types of trusts and Living Trusts - HG.org. (n.d.-e). https://www.hg.org/types-of-trusts.html