Living Trust vs. Revocable Trust

In estate planning, a living trust and a revocable trust are usually interchangeable. Both are considered revocable trusts. However, when one tries to define them just by the words used, a living trust can also be an irrevocable trust.

What is a revocable trust?

A revocable trust is a trust that can be changed, amended, modified, or revoked by the grantor while the grantor is alive. What makes a trust revocable is not its title or heading but the terms and provisions in the trust document. The trust document must contain language allowing the grantor to amend or revoke the trust.

What is a living trust?

Just from the words itself, a living trust can be defined as a trust created by the grantor while he is still living, where the grantor is still alive. Usually, a living trust is a revocable trust, where the grantor reserves upon himself the right to change, amend, modify or revoke the terms of the trust without need of beneficiary consent. However, there are trusts where the grantor is still living, but the terms of the trust contain language stating that the grantor cannot amend or revoke the trust’s provisions. In this case, even if the grantor is still living, the trust the grantor executed is an irrevocable trust.

Still, most estate planning lawyers will use the terms “living trust” and “revocable trust” interchangeably. Rarely, if not never, would you see a trust entitled “John Doe Living Trust” that is not a revocable trust. Most living trusts are styled as revocable trusts.

Most common form of revocable trust/living trust

The most common form of a revocable trust or living trust is the trust where the grantor is the trustee and the beneficiary. Because the grantor, trustee, and beneficiary are one and the same person, the grantor has total control over the trust property. There are also revocable trusts where the trustee and the beneficiary are different persons from the grantor. What is important in a revocable living trust is language in the trust allowing the grantor to modify or change who the trustee is and who the beneficiary is while the grantor is still alive.

What happens when a grantor in a revocable living trust dies

When the grantor in a revocable living trust dies, the trust becomes irrevocable. In the trust document, there is a successor trustee and successor beneficiaries. The successor trustee transfers the trust property from the grantor-trustee to himself and thereafter manages the trust property for the benefit of the successor beneficiaries.

The successor trustee also has a number of obligations that arise from the revocable trust becoming irrevocable such as getting a new tax identification number for the irrevocable trust, filing the appropriate tax returns, getting property appraised, etc. An estate planning lawyer and accountant can help you in this matter.

Should you need assistance in the making of a revocable living or an irrevocable trust, we at the Law Offices of Albert Goodwin are here for you. We have offices in New York City, Brooklyn, NY and Queens, NY. You can call us at 212-233-1233 or send us an email at [email protected].

Why the Terminology Matters

The distinction between "living trust" and "revocable trust" is mostly semantic in practice. In ordinary usage, people use the terms interchangeably to mean a trust created during the grantor's lifetime that the grantor can amend or revoke at will. But the underlying concepts are different:

"Living" describes when the trust was created — during the grantor's life rather than at death through a will. A trust created in a will is a testamentary trust; a trust created during life is an inter vivos trust (Latin for "between the living"). "Living" and "inter vivos" mean the same thing.

"Revocable" describes whether the grantor can change or undo the trust. A revocable trust can be amended or terminated by the grantor at any time during life. An irrevocable trust cannot be changed by the grantor's unilateral action (though limited modifications may be possible through decanting, court action, or other mechanisms).

The two distinctions cross. A living trust can be either revocable or irrevocable. A revocable trust is necessarily a living trust (testamentary trusts cannot be revocable in the relevant sense). The most common combination — what most people mean when they use either term — is a living trust that is also revocable.

Tax Treatment Differences

Living revocable trusts and irrevocable trusts have different tax treatments. The basic distinction:

Revocable trust during the grantor's life. The trust is treated as the grantor for tax purposes — the income is reported on the grantor's personal returns. The trust uses the grantor's Social Security Number rather than a separate tax ID. The grantor pays tax on the trust's income just as if the assets were in the grantor's own name.

Irrevocable trust. The trust is generally a separate taxpayer with its own EIN. The trust files Form 1041 federal returns and IT-205 New York returns. Trust tax rates are compressed — the trust hits the top tax bracket at much lower income levels than individuals. Distributions to beneficiaries can shift the tax burden to lower-bracket recipients.

Revocable trust after the grantor's death. The trust becomes irrevocable. It obtains its own EIN and begins filing as a separate taxpayer. Step-up in basis applies to assets included in the grantor's estate (which generally includes revocable trust assets).

The Step-Up in Basis Issue

Step-up in basis is one of the most valuable consequences of inheritance under U.S. tax law. When property is inherited, the recipient's tax basis is "stepped up" to the fair market value as of the date of death. This eliminates the accumulated capital gains that occurred during the decedent's lifetime.

Revocable trust assets typically qualify for step-up because the assets are included in the grantor's gross estate for federal estate tax purposes. The inclusion that triggers potential estate tax is the same inclusion that produces step-up in basis. For estates below the federal exclusion (currently very high), no estate tax is due, but the basis step-up still applies. This is one of the most powerful benefits of using a revocable trust as an estate planning tool.

Irrevocable trusts have more nuanced basis treatment. Assets transferred to an irrevocable trust during the grantor's lifetime generally take the grantor's carryover basis — not a stepped-up basis. Specific structures (intentionally defective grantor trusts, for example) can preserve step-up while achieving estate tax benefits. Planning around basis requires careful coordination.

When Each Type Makes Sense

The right choice depends on the grantor's goals:

Revocable living trust is the right choice when the grantor wants to maintain full control during life, avoid probate at death, plan for incapacity, and preserve flexibility to change the plan as life changes. The grantor accepts that the trust does not provide creditor protection or estate tax savings during life.

Irrevocable trust is the right choice when the grantor needs specific benefits that require relinquishing control — Medicaid asset protection, federal estate tax planning, creditor protection, or special-needs planning. The grantor accepts that the trust cannot be amended or undone without specific limited mechanisms.

Many comprehensive plans use both — a revocable living trust as the central probate-avoidance vehicle, plus one or more irrevocable trusts for specific purposes (an ILIT for life insurance, a SLAT for gift exemption use, a MAPT for Medicaid planning).

Common Misconceptions

Several misconceptions come up regularly:

"A revocable trust avoids estate tax." No. Revocable trust assets are included in the grantor's gross estate just like assets held individually. The revocable trust does not provide estate tax benefits during life.

"A revocable trust protects against creditors." No, not during the grantor's life. The grantor's creditors can reach revocable trust assets just as they could reach assets held individually. After the grantor's death, the trust assets are subject to claims of the grantor's creditors (although the procedure is different from probate creditor claims).

"All irrevocable trusts are the same." No. Irrevocable trusts come in many varieties with very different rules, tax treatment, and planning purposes. SLAT, ILIT, MAPT, IDGT, GRAT, CRT, CLT — each has its own design and use case.

"A trust eliminates the need for a will." No. Even with a fully funded trust, a pour-over will is generally recommended to catch any assets the grantor forgot to fund. A will is also the only place to nominate a guardian for minor children.