What's the Difference Between a Revocable Trust and an Irrevocable Trust for Taxes?

Revocable and irrevocable trusts serve different estate planning purposes, and they're treated very differently for tax purposes. A revocable trust (also called a living trust) can be changed or canceled by the person who created it at any time, which means the IRS treats it as transparent — the trust's income is reported on the creator's personal tax return and trust assets are still part of the taxable estate. An irrevocable trust generally cannot be changed once established, and in exchange for giving up control, the assets are typically removed from the creator's taxable estate, which can reduce estate taxes. Irrevocable trusts file their own tax returns and pay taxes at trust tax rates, which reach the top 37% bracket much faster than individual rates. The right type of trust depends on your goals: a revocable trust is mainly about avoiding probate, while an irrevocable trust is primarily a tax and asset protection tool.