Every adult in the San Fernando Valley should have a well-crafted estate plan in place. Yet, many people do not even have a will, let alone other estate planning documents. A survey cited by the AARP found that 6 in 10 U.S. adults lack any estate plan. A proper estate plan should be comprehensive. It should protect you, your family, and your assets no matter what tomorrow brings.
A living trust is an effective, efficient estate planning tool that can help many people protect their assets. A living trust may be revocable and irrevocable—there are very important differences between these two options. At Ourfalian & Ourfalian, we help families secure their futures. In this article, our Glendale estate planning attorneys explain the key things to know about the differences between a revocable living trust and an irrevocable living trust in California.
What is a Living Trust?
A trust is a legal relationship between several parties. The grantor/settler is the party that creates the trust. When a trust is created, it is overseen by a trustee who is responsible for receiving and managing the assets. Finally, the beneficiary is the party for whom the assets in the trust are being held. There are many different types of trusts. A living trust is one of the most common examples. Living trusts can be divided into two broad categories:
- Revocable Living Trust: The Cornell Legal Information Institute defines a revocable living trust as a trust in which “the settlor retains the ability to alter the trust or end the trust altogether.” You will often hear a revocable living trust referred to as a revocable trust. As a revocable trust can be easily revised, it is one of the most popular estate planning vehicles.
- Irrevocable Living Trust: While less commonly used, it is possible to create an alternative type of living trust called an irrevocable living trust. An irrevocable living trust is not nearly as flexible as it cannot be altered or taken back by the settlor. Still, in certain circumstances, an irrevocable living trust may be an effective way to protect assets.
Differences Between a Revocable Trust and an Irrevocable Trust
Modification of the Trust
Perhaps the most central difference between a revocable trust and an irrevocable trust is in the name itself. Revocable living trusts are among the most popular estate planning tools because they can be modified—and even revoked outright—at any time. A core advantage of a revocable living trust is that it allows the settlor (grantor) to retain full control over their property throughout their lifetime. Any assets placed within control of a revocable living trust can be moved or adjusted as the settlor sees fit.
In contrast, an irrevocable living trust cannot be changed by the grantor once it is put into place. Once the settlor funds and signs an irrevocable living trust, they lose their ability to alter the documents. In other words, they will lose direct control over the property and assets placed within an irrevocable living trust. It cannot be modified. The loss of direct control over property/assets is certainly a disadvantage of an irrevocable living trust compared to a revocable living trust.
Ownership of the Property
Another key difference between a revocable trust and an irrevocable trust is ownership of the property. As a revocable living trust stays within the control of the person who created it, the property and assets within the trust are still fundamentally owned by the person. They can control them and they will even be responsible for paying certain taxes on them.
On the other hand, all assets placed within the control of an irrevocable living trust are the property of the trust. With an irrevocable trust, the grantor has no more direct control over the property and assets included. They no longer own the property at all. The property is owned and controlled by the trust itself for the benefit of the named beneficiaries.
Protection of Assets
A revocable trust is a more flexible estate planning tool. It allows the trust grantor to retain control over their property and assets. That being said, there are limitations to what you can do with a revocable trust. Most importantly, a revocable living trust provides limited asset protection during the lifetime of the settlor. As the person who creates a revocable living trust still fundamentally has full control and ownership of the property/assets, creditors can try to make a claim against those assets to resolve an outstanding debt or other financial obligations.
On the other hand, irrevocable trusts offer strong asset protection. The assets placed within an irrevocable trust are no longer owned by the settlor. In effect, this means that creditors and other parties cannot pursue these assets to resolve debts and other claims. Irrevocable living trusts can be useful asset protection tools in many different circumstances, including when it comes to proactively protecting your estate from the risk posed by future long-term care costs.
Tax Implications (Estate Tax)
There are tax implications that come with creating a trust. A revocable living trust is taxed differently than an irrevocable living trust. Most notably, this is an issue when it comes to estate tax. The assets placed within a revocable trust are still owned and controlled by the grantor in the eyes of the IRS. Those assets will be subject to an estate tax if the estate tax applies. In contrast, the assets and property placed within the control of an irrevocable trust are no longer owned by the grantor. As such, assets within a valid irrevocable trust are generally not subject to estate tax liability.
Contact Our Estate Planning Attorney in the San Fernando Valley
At Ourfalian & Ourfalian, our Glendale estate planning lawyers have the skills, experience, and professional expertise to help you with all types of living trusts. If you have any questions about using a revocable living trust or an irrevocable living trust as part of your estate plan, we can help. Contact our estate planning law firm today to arrange your strictly private, no-obligation consultation. With an office in Glendale, we provide estate planning services throughout the San Fernando Valley, including in Pasadena, Burbank, North Pasadena, and Encino.
