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What Is The Difference Between Living Trusts And Irrevocable Trusts?

trusts

If you have researched estate planning, you may have heard about living trusts and irrevocable trusts. What is the difference, and which is better? Learn all about living and irrevocable trusts in this article, then our San Fernando Valley living trust attorneys can answer any estate planning and trust questions you have.

What Is A Trust?

A common estate planning tool is a trust, which transfers assets from your name into that of a legal entity. The purpose of the trust is generally to hold, safeguard, and distribute those transferred assets to your beneficiaries according to your wishes and goals.

While many think that trusts are only needed by the wealthy, millions of families could benefit by having a trust as part of their estate plan. The key is to understand which trust is better for your situation. There are two kinds of trust: revocable (living) and irrevocable. As the names suggest, the trustor can change a revocable or living trust. But in an irrevocable trust, the trustor cannot make changes without the beneficiaries’ permission.

Living Trust Overview

In a living trust, assets are put into a written trust for your benefit while you are still alive. Then, the assets are transferred to the beneficiaries that you designate in your trust when you die. This type of trust may also be called a revocable or family trust. Revocable means the trust’s terms can be changed while the trustor is alive. A living trust can be changed or revoked anytime during the trustor’s lifetime.

Living trusts are often part of comprehensive estate plans and are popular for avoiding probate.

Irrevocable Trust Overview

An irrevocable trust is one where the trustor cannot make a change to the assets in the trust unless the beneficiaries consent. There are two primary reasons that some individuals establish an irrevocable trust:

  • Saving on taxes: when a trustor makes an irrevocable trust, assets are not in their name. This means they are not part of the taxable estate. You may need to complete a gift tax return depending on the transfer value.
  • Protecting assets: When your assets are placed into the irrevocable trust, you no longer have a connection to them because they are not in your name. Also, as the trustor, you do not control the assets anymore. The trustee is in control, so if you get sued, a creditor cannot make the trustor take assets out to pay an outstanding debt.

Why Would You Want A Living Trust?

There are several unique advantages to living trusts that make them popular. They are:

  • Avoid probate: If the trust is properly funded, meaning the assets are in the trust’s name, the estate will not go to probate.
  • Customized estate planning: The living trust lets you establish a clear path for distributing assets how you wish.
  • More privacy: Taking assets out of your name and putting them into a trust usually gives you more privacy. Remember, probate records are open to the public.
  • Changeable: You can change or revoke a living trust when you like, giving you more control.
  • Incapacitation: If you become incapacitated, you can name a person to step in when you are mentally or physically unable to manage your affairs.

On the other hand, a living trust does not protect your assets because the trustor still controls the assets. So, they could be taken out to pay a creditor. Also, the tax benefits are less advantageous than those with an irrevocable trust.

Why Would You Want An Irrevocable Trust?

There also are things to like about irrevocable trusts. They include:

  • Avoid probate: If the irrevocable trust assets are in the trust’s name, they can stay out of probate.
  • Estate planning flexibility: Assets can be distributed as you want.
  • Reduce taxes: This trust is a robust tool to minimize taxes.
  • Privacy: An irrevocable trust ensures privacy. Probate is in the public record.

However, without the beneficiaries’ consent, you cannot change an irrevocable trust once it is set up. In some cases, you may need to file a motion in court. You also cannot access the assets you put in the irrevocable trust, which could cause problems getting loans or refinancing.

Next, you are not the trustee, so you have little control once the assets are in the trust. Lastly, irrevocable trusts are expensive to establish and require annual upkeep costs for tax returns and bookkeeping.

Which Trust Is Best?

The best way to know which trust is best for your situation is to review the matter with your estate planning attorney. Working with your attorney, who understands your trust options and your financial and tax situation, will help you achieve your estate planning goals.

Also, it should be noted that irrevocable trusts are often the choice of high-net-worth individuals with estate tax concerns, and those with possible creditor issues down the road. However, for many people, the tax advantages of an irrevocable trust are not as crucial because of the size of the estate. A living trust may be sufficient to address many estate planning needs for many people. You should always review your estate planning and financial goals with a licensed attorney to fully understand your trust options.

Contact Our San Fernando Valley Living Trust Attorneys

Our San Fernando Valley living trust attorneys at Ourfalian & Ourfalian have years of experience with estate planning, drafting wills, and setting up trusts. They can help with your estate planning and setting up a living trust, so call (818) 550-7777.

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Revocable Trust Vs Irrevocable Trust : Understanding the Differences

revocable trust

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.