Irrevocable trusts are important estate planning tools, created for the purpose of providing long-term asset management. The assets that are included in the trust are permanently transferred into the trust and this transfer of ownership cannot be revoked. There are different types of irrevocable trusts, but all of them require the person who creates the trust to relinquish their control and ownership of the trust property. Some states, including California, allow for certain limited modification of an irrevocable trust, in specific situations.
How is a revocable trust different?
A revocable trust, also referred to as a living trust, allows you the grantor to make modifications to the terms of the trust, or to revoke the trust altogether. This can be done at any time during your lifetime. However, after your death, the trust typically becomes irrevocable. A revocable trust is quite flexible because it can be modified whenever your circumstances change. The trustee of a revocable trust does not take over until your death or incapacity.
The benefits of an irrevocable trust
While an irrevocable trust is considered inflexible because it cannot be changed, there are some important benefits of creating such a trust, and to giving up control of your assets. In most cases, clients create irrevocable trusts in order to avoid estate taxes on the property in the trust. This also serves to eliminate the income generated by the trust assets from your personal income, which is beneficial for tax purposes. Finally, because trust assets are not required to go through probate, they can be distributed to the beneficiaries more easily and more quickly.
Types of irrevocable trusts available
There are a few commonly used irrevocable trusts that have specific purposes and benefits. One common type is a life insurance trust, which is designed to protect the proceeds of a life insurance policy from creditor claims and estate taxation. A split interest trust is also an irrevocable trust designed to provide income to one set of beneficiaries for one specific period of time, and then provide income to a different set of beneficiaries at another time.
Examples of split interest trusts
One example of a split interest trust arrangement is a charitable remainder trust. This type of trust is set up to pay an annual income to one beneficiary for a certain number of years. Then, at the end of that period, the remaining property is designated for a charity. Another split interest trust is the grantor retained income trust, which helps to reduce gift taxes on the transfer of assets to the next generation. With a grantor retained income trust, the creator of the trust retains an income interest in the transferred assets for a set number of years, and then the assets are distributed to the remainder beneficiaries, as named. Another common type of split interest irrevocable trust is known as a qualified personal residence trust. With this trust, you transfer your personal residence to the trust, while retaining exclusive use of that residence for a period of years. At the end of that period, the residence is transferred to your named beneficiary.
Can modifications ever be made to an irrevocable trust?
Despite being irrevocable by nature, an irrevocable trust can include certain carefully worded provisions that will allow modifications. For example, you can include a trust protector provision. A trust protector is basically a disinterested fiduciary, like an attorney or accountant, who has limited oversight authority. California trust law actually allows modification of an irrevocable trust under certain circumstances. In some situations, a trust needs to be amended, such as when the principle assets have become too low to support administration, for instance. The probate court will often allow modifications when an entity named as a beneficiary changes its structure, as well.
How irrevocable trusts protect assets
Protection from creditors is a very important benefit that trusts provide. However, in order to obtain true asset protection, your trust needs to be irrevocable. Why? Because once your money is transferred to the trust, it is no longer considered your money, so it is no longer subject to your creditors. If you still maintain the right to amend the trust and transfer the assets back to your control, then a creditor can still get its hands on those assets.
Terms to include for asset protection
First, the ownership interest you leave to your beneficiary must either be contingent on some future event, or be subject to the sole discretion of the trustee. Another option is to include a “spendthrift” provision. This type of language keeps creditors from making a claim against your beneficiary’s interest. Just remember that the assets are only protected as long as they remain in the trust. Once they have been transferred out of the trust, they become subject to a creditor’s claim again.
If you have questions regarding irrevocable trusts, or any other estate planning needs, please contact the Schomer Law Group either online or by calling us at (310) 337-7696. Or join us for a free seminar!