Irrevocable Trusts

What is the difference between a revocable and an irrevocable trust?  Should I have a revocable trust or an irrevocable trust?  These are questions I am asked all the time.

A revocable trust is easily changed.  For example, if you want to change the beneficiaries or trustees of a revocable trust, it's easily done with an amendment.  To change the terms of an irrevocable trust is much more involved.  One, you need the consent of all the beneficiaries; and secondly, it must be done through a court order.

Most people do not need an irrevocable trust, whereas anyone who owns real estate or has assets in excess of $100,000 is a prime candidate for a revocable trust.    Irrevocable trusts are done generally for estate tax planning, and are not needed on small or modest sized estates.  Larger estates which are potentially subject to estate tax oftentimes utilize both irrevocable trusts as well as revocable trusts.  Because ownership and control of assets are relinquished when transferred to an irrevocable trust, estate tax is also exempt on these assets.  By far, the most common irrevocable trust is an irrevocable life insurance trust.  It's a lot easier emotionally to give up control and ownership of a life insurance policy, which doesn't pay off until you die, as compared to say, cash, stock or real estate.  However, even with life insurance, once transferred to an irrevocable trust, you are also giving up any access to the cash value of a permanent policy.  A side question - isn't life insurance exempt from taxation?  Income tax, yes.  Estate tax, not necessarily.  It depends on the size of the estate, which is inclusive of life insurance death benefits.  For example, if the estate tax exemption is 3.5 million, and one has hard assets of a million and a million of life insurance, there's no estate tax.  However, if there is 2.5 million of hard assets and 2 million of life insurance, that is a total estate of 4.5 million, and if there is an exemption of 3.5 million, then 1 million is subject to estate tax, at approximately 40%.