One of the most common questions I get asked is: What is the difference between revocable and irrevocable? In my world, most people are referring to “Trusts” or other estate planning vehicles. And the it can be confusing, especially with so many terms floating around the Internet like; Revocable Living Trust, Irrevocable Children’s Trust, Revocable Will, Irrevocable Life Insurance Trust; Irrevocable Asset Protection Trust; Revocable Beneficiary; Irrevocable Beneficiary, and on and on. It’s no wonder people are confused.
Irrevocable vs. Revocable
So what do these terms really mean? Well let’s keep it very simple. Irrevocable mean that you cannot revoke it. You may think of it as irreversible, final or otherwise completed. Revocable, on the other hand, means that you can revoke it, or that it is reversible. Said differently, with a Revocable instrument you can change your mind and simply revoke it, whether it is a Will, a Trust, a Gift or even a Promise, whatever. And conversely, with an Irrevocable instrument, you cannot just change your mind, since you have irrevocably made the gift, will, trust, etc. The decision is final and irreversible and the gift stands.
When to use Irrevocable & Revocable
So why would we ever want to make an irrevocable decision if we can’t change our mind later? I mean, isn’t it better to keep your options open ? It depends on your goals. With a will or other document meant to dispose of your assets at your death, like a Revocable Living Trust, then yes, keeping your options open is very important. Most people change their mind or life situation many times before they die, so it makes complete sense to most often use a revocable instrument in that case.
On the other hand, if you want to reduce the size of your estate for tax purposes, then using a revocable gift or trust will not help you at all since the Tax Code will simply ignore the gift. In that case you must use an Irrevocable Trust, or gift to accomplish your task.
What about Asset Protection
So what about Asset Protection? Now that you understand the basic difference between revocable and irrevocable, which type of planning would you expect to stand up in an attack on your wealth? If you guessed irrevocable, you got it! Why? Well for the very same reason that a gift which is revocable is still considered by the IRS as yours, since you can take it back any time you want. An asset protection plan that you can revoke at your discretion would run into the same problem as a gift you could take back. A court could simply tell you to revoke your planning and poof – There goes your asset protection.
So in a nutshell, if you need flexibility and want to be able to change your mind, then you probably want to use a revocable plan. If you want to truly protect your assets, then for sure the only way to go is with an irrevocable plan. Which leaves us with one big question: “Is there a way to still have control of your assets, even if they are in an irrevocable asset protection plan?” The answer is YES, if you know how.