Revocable vs Irrevocable Trusts

Revocable trust: flexibility and control

A revocable trust is a trust that the settlor can amend, modify or revoke at any time during their lifetime. The settlor retains full control over the assets and can reclaim them at their discretion. This structure is commonly used in the United States (revocable living trust) to avoid probate, but it is less common in international wealth planning.

From a legal perspective, a revocable trust is generally considered an extension of the settlor's personal estate. The assets remain accessible to the settlor's creditors and are taken into account for tax purposes. A revocable trust therefore does not provide significant asset protection during the settlor's lifetime.

• Advantages: Total flexibility, ability to amend terms or reclaim assets, simplicity of management.
• Limitations: No protection against the settlor's creditors, fiscal transparency (trust income is taxed at the settlor's level), no effective patrimonial separation.

Irrevocable trust: protection and separation

An irrevocable trust is a trust that the settlor cannot revoke or unilaterally amend after its creation. The settlor permanently divests assets in favour of the trustee, who administers them on behalf of the beneficiaries. This effective patrimonial separation is at the core of the protection offered by an irrevocable trust.

The irrevocable trust is the preferred structure in international wealth planning. It offers robust protection against the settlor's creditors, potential fiscal separation and a durable structure for intergenerational wealth transmission.

• Advantages: Enhanced asset protection, potential fiscal separation, durability of the structure, protection against professional and matrimonial risks.
• Limitations: Loss of direct control by the settlor, difficulty of amendment, need for a trusted professional trustee.

Detailed comparison

The following summary highlights the principal differences between the two types of trusts:

• Settlor's control: A revocable trust allows the settlor to retain full control; an irrevocable trust involves permanent divestment.
• Asset protection: A revocable trust does not offer significant protection; an irrevocable trust creates an effective patrimonial separation.
• Tax treatment: A revocable trust is generally transparent; an irrevocable trust may be treated as a separate entity.
• Succession: A revocable trust generally becomes irrevocable upon the settlor's death; an irrevocable trust is operational immediately.
• Amendment: A revocable trust can be amended at will; an irrevocable trust requires specific mechanisms.

Flexibility mechanisms within an irrevocable trust

The irrevocable nature of a trust does not mean absolute rigidity. Several legal mechanisms allow flexibility to be introduced:

• Protector's powers: The protector may hold extensive powers, such as amending the class of beneficiaries, changing the governing law or removing and replacing the trustee.
• Settlor's reserved powers: Certain specific powers may be reserved to the settlor in the trust deed without undermining the irrevocable nature of the trust.
• Adaptation clauses: The trust deed may include mechanisms for adaptation to legislative changes or unforeseen circumstances.
• Variation of trusts: In certain jurisdictions, a court may authorise amendment of the trust terms in the interest of the beneficiaries.

Our team supports you in designing an irrevocable trust that incorporates the necessary flexibility mechanisms to address future developments, while preserving the asset protection you seek.