Revocable vs. Irrevocable Trusts: Which One Fits Your Estate Planning Needs?

Estate planning allows you to determine what happens to your estate when you become incapacitated or pass away. Among other things, it allows you to protect your assets, ensure your loved ones will be cared for, and distribute your assets according to your wishes.

Setting up a revocable or irrevocable trust is one of the most effective ways to achieve your estate planning goals. This blog post breaks down the differences between revocable and irrevocable trusts to help you decide which fits your estate planning needs.

What is a Trust?

A trust is a legal arrangement where you (the grantor) transfer your assets to another party (the trustee) to hold and manage on behalf of another (the beneficiary). Think of it as a way to protect your assets and dictate what happens to them when you pass away or become incapacitated.

Why Set Up a Trust?

Trusts are commonly used to achieve the following estate planning goals:

• Enable assets to avoid probate
• Minimize estate taxes
• Protect assets from creditors and litigation
• Preserve assets for future generations
• Manage your assets when you become incapacitated or pass away

When setting up a trust, you must choose between a revocable and irrevocable trust. Each has unique benefits and limitations, and choosing the right one depends on your goals, assets, and estate planning needs.

Revocable Trusts: Flexibility at Its Finest

A revocable trust (also called a living trust) allows you to retain complete control over your assets during your lifetime. You can amend, add to, or revoke the trust entirely if your circumstances or wishes change.

The Benefits of a Revocable Trust:

Revocable trusts are popular because of their flexibility. Here are some of the main reasons many Virginia families choose them:

1. Avoids Probate: A revocable trust bypasses the lengthy and public probate process, saving your loved ones time, stress, and money.
2. Flexibility: You can update or revoke the trust as your circumstances change.
3. Continued Control: By acting as the trustee, you can retain complete control of the trust and its assets while you are alive and well.

Examples:

• Mark remarries and wants to ensure both his new spouse and children from his first marriage are taken care of. A revocable trust allows him to adjust the terms to reflect his blended family’s changing needs.
• Victor, a Virginia entrepreneur, places his business in a revocable trust. As his company grows, he updates the trust to reflect its increased value and evolving tax strategies.

Irrevocable Trusts: Stability and Asset Protection

As the name suggests, an irrevocable trust cannot be changed or revoked once established. Once you transfer your assets into an irrevocable trust, they are no longer considered your property, which offers significant benefits for certain estate planning goals.

The Benefits of an Irrevocable Trust:

An irrevocable trust offers more rigid terms but comes with significant advantages. Most importantly:

1. Asset Protection: Because assets in an irrevocable trust are no longer legally yours, they are often shielded from creditors or lawsuits.
2. Tax Benefits: Transferring assets to an irrevocable trust can help reduce estate taxes, which can be a big benefit if you have a large estate.
3. Long Term Care/Medicaid Planning: In Virginia, irrevocable trusts are frequently used to protect assets when applying for Medicaid to cover long-term care costs.

Examples:

• Dr. Carter, a surgeon in Alexandria, creates an irrevocable trust to protect his savings and real estate from malpractice claims.
• Nancy, a retiree in Arlington, uses an irrevocable trust to safeguard her home’s value for her children while ensuring she qualifies for Medicaid to cover nursing home costs.
• The Smith family places a large life insurance policy in an irrevocable life insurance trust (ILIT), ensuring the death benefit is not subject to estate taxes.

Key Considerations When Choosing Between a Revocable or Irrevocable Trust

When deciding between a revocable and irrevocable trust, consider the following factors:

1. Cost: An irrevocable trust is more expensive to establish and maintain. For example, the trust will have to file its own taxes every year in which it incurs $600 or more of income. Then, that income is taxed per a compressed incremental tax table, where the income is taxed at the highest rate of 37% after just $15,200 of income as of 2025. And when asset protection is the goal, an independent Trustee will be the optimal choice, and you’ll need to pay that trustee for their services. So in order to obtain the benefits of irrevocable trust planning, you need to be prepared to incur the monetary costs.
2. Your Control Over Assets: If you want to maintain complete control of your assets, a revocable trust may be the better choice. With an irrevocable trust, you would give up control over trust assets to the independent trustee in order to achieve maximum asset protection.
3. Tax Planning Needs: An irrevocable trust can offer significant tax savings if you have a large estate and with the implementation of proper strategies. We’re talking 8 figures of wealth at least, though, so if that’s not you, then you are unlikely to realize any tax related savings from implementing an irrevocable trust plan.
4. Long-Term Care Planning: Virginia has strict Medicaid eligibility rules. An irrevocable trust can help protect assets from Medicaid spend down, but it must be established at least five years before applying for Medicaid.

An experienced Virginia estate planning attorney can help you weigh the pros and cons of revocable and irrevocable trusts and ensure your choice of trust fits your estate planning needs.

Consult an Experienced Virginia Estate Planning Attorney

Setting up a trust involves complex decisions, and Virginia’s estate laws can add layers of complexities. Without proper guidance, you might face unintended consequences. This is where an estate planning attorney can make all the difference.

Our law firm helps Virginians set up trusts for comprehensive and effective estate planning. Contact us today at (703) 553-2577 or use the contact form to schedule a consultation and take the first step toward securing your family’s future.