Revocable Living Trust vs Irrevocable Living Trust: Reasons You Should have a Trust in California

Key Takeaways from this article

You’ll learn,

• Why do you need trust when you do estate planning?
• What is meant irrevocable trust and revocable trust?
• What benefit you’ll get from it?
• And which type of trust will best suit for you?

When you do your estate planning, you may write a will and add a clause for each family member. The person who does this is called the testator. You can also place assets into a trust, a legal entity that allows you to control how your assets, investments, and real property are distributed to your future heirs. There will be clauses outlined by the trust maker, also known as the trustor or grantor, regarding who the beneficiaries are, where they should receive their payments, and when they should receive them.

Making your wishes known upon your death or incapacity regarding the legacy of your property is a good thing. A will is one way to go. However, it will not keep you out of probate court. This article may be interested in avoiding the lengthy, frustrating, and expensive probate court you.  

If set up by professional legal counsel, a trust will help you avoid Probate. See my associated article here that dives deeper into the differences between a Will and a Trust, the nature of probate court, and why 95% of American Estates land in probate court. I’ll say briefly now that I am not an attorney or an accountant. Nothing in this article is meant to be legal or tax advice. I always encourage you to seek professional legal and tax counsel.

I’m a Realtor that works closely and daily with families whose cases are in Probate. These families typically need to sell the home to liquidate or cash in on that most valuable asset and distribute the proceeds to the heirs. If I can help families avoid probate court, it’s a year-long process, delays, heartaches, and costs to the estate. That is my purpose in writing this article.

Generally, we can broadly divide Trusts into two categories; revocable and irrevocable trusts—inlay the terms changeable and non-changeable. The best type of trust for you and your family is best left to a discussion between you and legal counsel and can be easily and quickly clarified.  

I always recommend consulting with a Trust Specialist Attorney and a tax accountant. Typically, you can ask for a free consultation from a lawyer trust specialist if you call and ask. After just a few questions about your goals for the trust during a brief interview, a specialist attorney can best advise you on which type of trust is best for you. The same is true with a tax accountant. A professional tax accountant can best advise you through a phone call with a description of the structure and contents and the stated goals of the trust. 

Will vs. Trust: What’s the Difference?

Usually, the will is only active after your death. But the trust is active as soon as you create it. In my point of you, compare the will to the trust, trust is a better option for whoever does estate planning. because it helps you to avoid probate, saves you a lot of money from taxes, and even more. You may rea the more in detail from this article Living Trust vs Will in California: How to choose the right one for your estate plan?

What is an irrevocable trust?

An irrevocable trust cannot be changed or revoked once it has been created, although it can be amended or interpreted differently than the settlor initially intended. Irrevocable trusts are popular with those looking for a greater level of control over how assets in their name are managed and distributed while alive and after death. 

Once a Trust Specialist Attorney sets up a trust, it’s typically not challenged or revoked. All the assets are effectively transferred to a grantee in an irrevocable trust. Establishing a trust legally removes the grantors’ ownership rights.  These assets can include a business, property, financial investments, and life insurance policies. Once an irrevocable trust is created without the Beneficiary’s permission, the grantor does not control or have the ability to change the assets once they have been transferred into the trust.  

Revocable vs. Irrevocable

A revocable or living trust is an alternative to an irrevocable trust. A revocable trust allows you to make changes without fear at any point during your lifetime because your assets aren’t technically owned by it yet, even before your passing. However, if you want to add new assets later down the line – let’s say another property – this will require establishing another estate plan specifically for that piece of real estate. One common error I see as a Realtor is that an individual or couple has a home within a Revocable or Living Trust. They pull the house out of the trust to refinance it. Then they forget to transfer ownership of the home back into the trust. This oversight could most assuredly land the trust and your property in probate court. The title needs to be transferred from the couple or individual back into the trust to avoid a dispute and a potentially lengthy and costly court review.

Benefits of Irrevocable Trusts

To avoid or reduce the taxes: 

Suppose you wish to minimize estate taxes, set up a “charitable remainder trust” that provides an income stream to you and your family but ultimately goes to the charity upon your death. A co-trustee must be appointed who has the power to overrule your known wishes and can veto the trust’s distribution of income if it isn’t in the best interest of the Beneficiaries. A person could serve as both the Trustee and benefactor in rare instances.

The better you continue to learn about the ways to use trusts and endowments to protect your family’s hard-earned wealth, seek professional counsel from an experienced estate planning attorney specialist. Consider making “gifts/incremental gifts” and how they could potentially impact estate taxes. Equally as relevant is that one should certainly consider carefully investing in annuities or other lifetime income products (or purchasing insurance) while protecting one’s assets – particularly in a high-risk environment. Always seek professional investment counsel and share your financials with your tax accountant advisor.

Eligibility for Government Programs: 

A person on Medicaid or SSI can’t own too much money or assets or be given or gifted too much. Above a certain income threshold, government benefits may be taken away. Irrevocable trusts can protect assets to ensure these income limits are not exceeded. The Trustee of these trusts can not be the creator. These Medicaid trusts are like estate tax savings trusts in that the Beneficiary can’t control the assets. Meaning that Medicaid and SSI benefits will continue because the trust funds are not counted as the Beneficiary’s assets and income.

Save Your Assets. 

Creditors are interested in seizing trust fund assets. For this reason, trusts usually avoid passing through any member of the same family who might have an interest in the trust fund, which means that the Trustee and Beneficiary must separate people whose interests may or may not overlap. Suppose you create such a trust in a state with favorable laws. In that case, using a corporation rather than an individual entity as Trustee or Beneficiary is usually required (so if you hold assets in your name, you may find it difficult to set up protective trusts). Again, I’m not an attorney, accountant, or investment advisor. Always seek professional advice. You would be amazed at how a 10-minute phone consultation can completely change your thinking, strategies, and choices. We make decisions based on information.

Changing an irrevocable trust can be tricky.

When we set up a trust, rules govern what we can do with trust funds. In California, irrevocable trusts don’t allow us to make changes unless we meet some established criteria. These criteria include; it costs too much to administer the trust or if there aren’t enough assets to justify continuing with the original arrangement. The only way to make dramatic changes like disassembling the trust is typically by getting permission from all the beneficiaries involved.

You may not be able to terminate a trust without consent in certain states, even if it suits the grantor’s wishes. Some trusts include a spendthrift clause preventing the fraudulent or reckless disbursement of assets.

Is a living trust revocable or irrevocable right for you?

A revocable trust is a good choice, particularly if you want:

To avoid Probate. 

If you own property in multiple states, you can avoid Probate. Probate happens when the court oversees the disposition of an estate and determines how assets should be distributed after the death of the donor or grantor. If you want to create a trust with maximum control and minimal participation from others, it’s best to go with a revocable trust.

Trusts are designed to avoid Probate. However, it isn’t guaranteed that Probate won’t be necessary. If the ownership of the assets is not transferred to the trust, if the trust is not set up correctly, Probate will still be needed. Assets, investments, and real property must be transferred from you to the trust.

An irrevocable trust is a good choice, particularly if you need:

Estate tax reduction. 

An irrevocable trust means that the owner cannot legally change any of the terms and conditions after being established. The settlor (grantor) can’t change any of the stipulations written in their will, which are also reflected in the trust. Anything owned by the trust is now owned by whoever is designated as a beneficiary later by way of laws such as inheritance laws. Generally, this type of law doesn’t apply to taxes from anything put into an irrevocable trust. After being transferred into the trust, personal and real assets are no longer considered part of one’s estate since it does not legally belong to them anymore. Instead, the trust belongs to the beneficiaries and Trustee in this instance.  Assets can pass to the beneficiaries without being subject to estate taxes.

Asset Protection. 

Once established, you no longer legally own the assets you used to fund an irrevocable trust. An irrevocable trust is not subject to an owner’s liabilities. If you have your family in charge of the trust, you still get to keep your wealth within the family, just without having to worry about any liabilities yourself. Suppose the Beneficiary becomes bankrupt or is sued. In that case, assets held in the trust are protected against liability claims because they no longer form a part of the Beneficiary’s property or assets. However, the assets of the unit trust or company are not fully protected.

Conclusion

Trusts to help avoid any unnecessary legal hassle upon death and benefit from tax exemptions to liquidating real property, investment holdings, and other personal assets. It’s helpful to note that establishing a trust can be costly, time-consuming, and tedious. A little time and expense up front will pay your heirs richly in the event of your death. Avoiding probate court can save a full year of headaches and heartaches and preserve 2-4% of your estate that court fees and costs might have otherwise eaten up. No matter which you choose, establishing a trust can help you preserve your hard-earned wealth and help your heirs avoid the costs, headaches, and delays of probate court. 

If you’re looking to protect your estate, then a living trust may be the best option for you. It provides flexibility and ease of mind. An irrevocable trust may be more appropriate if you’re looking for a tax-advantages and asset protection. Either way, by establishing trust and passing down instructions, you are setting up the one who ultimately inherits your estate with guidelines to follow so that they can carry out your wishes! Trusts give comfort and direction, especially if your heirs don’t know much about finances or aren’t as financially literate. Preserve the estate’s capital and the heirs’ peace of mind with a Trust if you need an introduction to a professional tax accountant or need to find the best Trust SpecialistSpecialist attorney in your area. Call Kevin McClenahan – Realtor at 858.284.7778 or email if after hours to KevinSellHomeFast@gmail.com. I’ll put you in touch with the SpecialistSpecialist that best suits your needs anywhere in California.