What is the difference between an irrevocable and revocable trust?

Video Transcript

Probably one of the more common questions I get when my clients do a consultation is whether their trust should be revocable or irrevocable. The real primary difference, and it's a big difference, is with a revocable trust, you can change the terms of the trust anytime you want. With an irrevocable trust, you can't.

Obviously, there has to be a pretty compelling reason why you're going to set up a trust that you can't change the terms of. Most people I tell them, you know, you obviously want typically to do a revocable trust because if things change, you want to be able to change who's in charge, and more importantly, you want to be able to change maybe who gets things. Especially, you know, as I always tell my clients, you know, when your children are older, probably married, you like their spouse, that's potentially when the time comes where you might consider doing irrevocable decisions.

But I always caution my clients, you know, these decisions, if you have an irrevocable trust, you can't change your mind about it. So if your relationship with your children or whoever the heirs are, or whoever the agents are, changes, you may not be able to change those things. Again, there must be a compelling reason to do so.

Quite often, the reason why we're pretty much doing 99% revocable trusts is because usually the benefits of an irrevocable trust are outweighed by the risks, and again, the fact that you can't change your mind, and the fact that when you do an irrevocable trust, typically for there to be some benefit, some legal benefit to come out of the irrevocable trust, or even a tax benefit to come out of the irrevocable trust, you're giving up either control, and certainly access, to that trust.

So whoever created the irrevocable trust can pretty much no longer really benefit the trust much. Maybe you can get some income, but you no longer generally have access to the principal. So you just have to ask yourself, is it worth giving up control and/or access to these funds in exchange for a benefit I probably will never benefit from? Maybe my family will benefit from, but I typically will never benefit from that irrevocable trust, and I can't change my mind about it.

That's why, you know, what turns out happening is people, they even come to us with the idea "I want an irrevocable trust," you know, 80, 90% of the time, I end up talking them out of it. That's because, you know, I pose the risk: What is the risk? The risk of whatever thing that you're concerned about happening? Or is it the relationship with the people that you put in the documents where you can't, and then you can't change your mind about it?

Typically, usually because of the age of the client or the age of the children, they'll choose not to do an irrevocable trust because it's just not worth the risk for something that really is not going to typically benefit them.