There are different types of trusts with different benefits and goals. However, all trusts are categorized as either revocable or irrevocable. The distinction is important because, depending on the type of trust, you may or may not be able to modify its terms. When you consider revocable trust vs. irrevocable trust, here is what you need to know to decide which is best for your needs.
What you should know about irrevocable trusts
Irrevocable trusts are common estate planning tools that allow for long-term asset management. Trust property is considered permanently transferred to an irrevocable trust, which means the transfer of ownership of that property cannot be revoked once the trust has been executed. There are different kinds of irrevocable trusts, all of which require the person who creates the trust to give up all control and ownership of the trust property. A few states, including California, allow limited modifications to be made to an irrevocable trust under certain circumstances.
Revocable trust vs. irrevocable trust
A revocable trust, which is oftentimes referred to as a living trust, gives the grantor the ability to make changes to the terms of the trust. A revocable trust can also be revoked 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 still some important benefits to creating this type of 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.
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 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.
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.
Your estate plan probably has a trust and, if it does, you may be wondering whether you can modify it. If it is a revocable trust, the answer is yes. For nearly everyone who includes revocable trusts in their plan, the time will eventually come when you need to make changes. This is especially true when certain aspects of your life change like your finances or new beneficiaries. In fact, it is likely that the need to make modifications will arise more than once during your life.
Methods for making modifications to your trust
A revocable trust can be very beneficial, particularly because of its flexibility. In fact, not only can you modify revocable trusts, but there are several ways to do it. Obviously, you can revoke the trust, which means to cancel it and start over from scratch. But, that is a drastic measure and certainly not the only one available. You can also create an amendment or simply restate the terms.
Determining whether to amend or revoke your trust
Regardless of which method you choose, revocation or amendment, the result will ultimately be the same. There are some cases where an amendment may be the easiest way to go. For instance, if you get married or have a new child, amending your trust to include those new beneficiaries would be quite simple. If your revisions are complicated, revoking the trust and starting over could be a better choice. Revocation would give you a way to ensure the new terms are clear and accurate.
Download this FREE estate planning worksheet! If you have questions regarding revocable trusts, or any other estate planning needs, please contact the Schomer Law Group for a consultation, either online or by calling us at (310) 337-7696.