A revocable trust and living trust are separate terms that describe the same thing: a trust in which the terms can be changed at any time.

Trusts Explained

A trust is a separate legal entity a person sets up to manage his assets. Once assets are placed inside a trust, a person known as a trustee manages them. The trustee determines how the assets are invested and to whom they are distributed when the owner of the trust dies. It is common for a wealthy person to use a trust as opposed to a will for estate planning and for stipulating what happens to his wealth upon his death.

Revocable/Living Trust vs. Irrevocable Trust

The two basic types of trusts are a revocable trust, also known as a revocable living trust or simply a living trust, and an irrevocable trust. The owner of a revocable trust may change its terms at any time. He can remove beneficiaries, designate new ones and modify stipulations as to how assets within the trust are managed.

The terms of an irrevocable trust, in contrast, are set in stone the minute the agreement is signed. Except under exceedingly rare circumstances, no changes may be made to an irrevocable trust.

Disadvantages of a Revocable Trust

Given their flexibility in contrast with the rigidity of an irrevocable trust, it seems all trusts should be revocable. The reason they are not is because revocable trusts come with a few key disadvantages.

Because the owner retains such a level of control over a revocable trust, the assets he puts into it are not shielded from creditors the way they are in an irrevocable trust. If he is sued, his trust assets can be ordered liquidated to satisfy any judgment put forth. When the owner of a revocable trust dies, the assets held in trust are also subject to both state and federal estate taxes.

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