The main difference between a revocable trust and an irrevocable trust is the amount of control the settlor (the person establishing the trust) retains after the trust is created.
When you establish a revocable trust, you keep the power to make changes to it, or to completely do away with it and take back the trust property, at any time. This gives you a lot of flexibility, but because you retain full control over the trust, for financial purposes, you’re treated like you still own the trust property. This means that the trust doesn’t give you protection from your creditors. It also means that, in the eyes of the IRS, any income earned by the trust is taxable to you. Revocable trusts are most often established to help the settlor pass on property to his or her heirs without the need for probate.
An irrevocable trust, on the other hand, can’t be changed or taken back once it’s created. After you establish the trust, you have no further control over it. Because it’s irrevocable, the law treats this type of trust as a separate legal entity. An irrevocable trust gets its own tax identification number from the IRS and files its own tax returns, separate from your personal tax returns.
People often use irrevocable trusts to reduce their estate taxes or to protect their assets from creditors. Since you give up control over the trust once it’s created, the law recognizes that the property in the trust no longer belongs to you. Since it’s not yours, you are not responsible for the taxes, and creditors can’t reach the property in order to collect on your personal debts.
Because the uses and benefits of revocable and irrevocable trusts are completely different, it’s important to consult with an attorney before you establish a trust. Unintended wording in the trust document can have serious consequences for you.