Irrevocable trusts are very useful estate planning devices that are often used for long-term management of assets. There are various types of irrevocable trusts that can be used for different purposes in estate planning. When you transfer assets to your trust, they are permanently removed from your estate and the transfer of ownership to the trust cannot be revoked. Our Los Angeles estate planning attorneys can explain everything you need to know about irrevocable trusts.
The many benefits of irrevocable trusts
Although irrevocable trusts are considered less flexible because they cannot be changed, there are some important benefits to 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.
Which type of irrevocable trust do I need?
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. If you need help, our Los Angeles estate planning attorneys can help you choose.
What makes revocable trusts different?
A revocable trust or 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.
Do I need a 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.
What if I need modification to my 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 principal 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. Let our Los Angeles estate planning attorneys help if you need changes.
Understanding 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.
What specific terms need to be included to protect my assets?
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.
Download our FREE estate planning worksheet today! If you have questions regarding estate planning, trust contests, or any other trust administration issues, please contact the Schomer Law Group either online or by calling us in Los Angeles at (310) 337-7696, and in Orange County at (562) 346-3209.
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