Living Trusts vs. Revocable Trusts

When it comes to planning your estate, knowing the differences between living and revocable trusts is important. Both options can offer you ways to manage and distribute your assets while avoiding probate. But, they have distinct features that may impact your financial and legal strategy. Choosing the right trust depends on your goals. These can include maintaining control over assets, minimizing taxes or distributing an inheritance. A financial advisor can help evaluate your estate and guide you toward the trust that aligns with your objectives.

What Is a Living Trust?

A living trust is a legal document that allows you to place your assets into a trust during your lifetime. These assets are then managed by a trustee — either yourself or a designated individual — for your beneficiaries.

One of the primary benefits of a living trust is that it bypasses probate, which can allow for a quicker and more private transfer of assets after your death.

Living trusts can include specific instructions that could determine how and when beneficiaries receive assets. This type of trust is an effective tool for streamlining estate planning as it provides clear guidance on asset distribution.

What Is a Revocable Trust?

A revocable trust is a specific type of living trust that can be modified, amended or revoked during the grantor’s lifetime. This flexibility makes it a popular choice for those who want to retain control over their assets and make adjustments as circumstances change.

For example, you might set up a revocable trust to handle your investments. This type of trust allows you to make changes, such as adjusting your financial situation or modifying beneficiaries, as needed. When you pass away, the revocable trust becomes irrevocable, and your assets are distributed as you specified.

Revocable trusts are particularly beneficial for those who anticipate life changes like marriage, divorce, or having children. They offer flexibility in estate planning, allowing adjustments without needing a total rewrite.

Revocable Living Trust vs. Irrevocable Living Trust

A woman creating an estate plan for your family.

While a revocable living trust is one type of living trust, another common type is the irrevocable living trust. They share some similarities, but knowing the differences is important for your estate plan. Here’s how they compare in four common ways:

Flexibility:
- A revocable living trust allows you to modify, amend, or revoke the trust during your lifetime, providing maximum control over your assets.
- An irrevocable living trust, once established, cannot be changed without the consent of beneficiaries or a court order.
Control:
- In a revocable living trust, you retain control over the assets and their management until your death or incapacity.
- In an irrevocable living trust, you relinquish ownership and control of the assets, transferring them to the trust permanently.
Tax Implications:
- Assets in a revocable living trust are included in your taxable estate and do not offer significant tax advantages.
- Irrevocable living trusts can remove assets from your taxable estate, potentially reducing estate taxes and shielding assets from creditors.
Asset Protection:
- A revocable living trust offers little protection from creditors or legal claims since the assets remain under your ownership.
- An irrevocable living trust provides a higher degree of protection by placing assets beyond the reach of creditors and lawsuits.

How to Choose the Right Trust for You

Choosing between a living trust and a revocable trust involves evaluating your goals, financial situation and long-term plans. Here are five factors to consider:

Flexibility Needs:
- If you anticipate significant life changes or want to retain full control over your assets, a revocable trust may be the better choice.
Privacy Concerns:
- Both living and revocable trusts avoid probate, providing privacy for your estate. However, an irrevocable trust offers additional layers of protection and confidentiality.
Tax Strategies:
- Consult with a financial advisor or tax consultant to determine whether a trust can help minimize estate taxes or protect your assets from creditors.
Beneficiary Considerations:
- Think about the specific needs of your beneficiaries. For example, you might want to structure a trust to provide for minor children or individuals with special needs.
Complexity of Your Estate:
- Larger or more complex estates may benefit from a combination of trusts to address different goals, such as asset protection and tax efficiency.

Bottom Line

A woman preparing documents for her estate plan.

Knowing the differences between living and revocable trusts is important for effective estate planning. Both types can help you avoid probate and manage assets, but they have different features to serve specific needs. A financial advisor or estate planning attorney can help you select which trust can protect your legacy and meet your financial goals.

Tips for Estate Planning

A financial advisor can help you create an estate plan to manage and distribute assets. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
While it may be tempting to save some money and plan your estate by yourself, you should still be careful with these DIY estate planning pitfalls.