What are the differences between revocable and irrevocable trusts?
A trust may be either revocable or irrevocable. The primary difference between revocable or irrevocable trusts is that revocable trusts can be amended whenever the Trustmaker desires without needing court permission. Revocable trusts are popular because they provide the Trustmaker with maximum flexibility for controlling all the property in the trust plus the ability to change the plan at any time without anyone else's permission. With an irrevocable trust, the Trustmaker may not independently amend the trust without court permission. A trust that does not expressly reserve the power to revoke is considered an irrevocable trust.
Irrevocable trusts are used for special planning goals and are appropriate when the benefits to be achieved outweigh the ability to amend without court permission. Irrevocable trusts may be used in special circumstances to achieve estate and income tax planning goals; protect the estate from nursing home costs; obtain asset protection for beneficiaries; or to plan for persons with special needs.
During the Trustmaker's lifetime, revocable trusts pose no income tax issues because the income and expenses "pass through" to the Trustmaker and are reported on the Trustmaker's personal income tax return. Following the death of the Trustmaker, the trust becomes irrevocable and therefore a separate taxable entity with its own taxpayer identification number.