I question I often get is what the difference between an irrevocable trust and a revocable trust, also called a living trust or inter vivos trust.
Before we start talking about these trusts, there’s three basic definitions I want to get out there. There’s the person that creates the trust; the person that manages the trust; and the person or thing that receives from the trust. The person that makes the trust is the grantor, trustor, or settlor. All these words mean the same thing. The person that manages the trust is the trustee. He or she is the fiduciary, they manage the assets, carry and follow out the wishes outlined in the trust. Finally, you have the beneficiary and that’s the charity or person that’s getting stuff from the trust. So, the trustor makes the trust. The trustee manages the trust. The beneficiary receives from the trust.
A revocable trust is a trust that can be revoked at any time. It’s just an extension of the trustor. It can be amended. It can be changed. It can be just completely ended at any time. They can also put things in, take things out. It’s very flexible because it’s not irrevocable. It’s revocable. When it comes time for tax filing, it’s actually just an extension of the person that created it. The trustor would report it on his own tax return. The revocable trust doesn’t have its own EIN and for all intents and purposes, it’s not it’s own entity. It’s just an extension of the trustor.
An irrevocable trust on the other hand, cannot be revoked. It cannot be changed. It cannot be amended. It is, basically, what it is. The trustor creates it and that is what it is. It is not an extension of the trustor. An irrevocable trust actually has its own EIN number and it’s even its own entity for all intents and purposes. It is a stand-alone person, kind of. It files its own tax return, has its own EIN. It still has a trustor that established it. It still has the trustee that manages it. And it still has the beneficiary, but the trustor can’t just put things in and take things out. If it puts things in, the trustee has to allow it to come back out. Unlike a revocable trust, which typically the trustor, the trustee and sometimes the beneficiary are all the same person at the beginning, the irrevocable trust typically has a trustor, a different trustee and a beneficiary that’s different than the trustor or the trustor. But typically the trustee is different because irrevocable trusts are used a lot in asset protection and removing things from people’s estates.
Both of these trusts serve different purposes. This is a basic overview of trusts, because they can become quite complex and there’s several different types of irrevocable trusts, which I’m going to get into in the future. But, if you have any questions about this topic or other topics, follow the link below schedule your time to come in or talk on the phone. We can talk about this topic and talk about your estate plan, where this fits in and if it fits into your plan.
William C. Deveneau is an attorney practicing in Southern Vermont, including Bennington and Manchester, and New York, including Albany, Colonie, Hoosick Falls, and Troy.