Understanding the Difference Between Revocable and Irrevocable Living Trusts

Serving Clients Throughout Sonoma, Mendocino, Lake, and Napa Counties

Living trusts are a highly-effective estate planning tool that can spare your loved ones the expensive and time-consuming probate process. Once established, they allow a third party (known as a trustee) to hold and manage assets on behalf of your beneficiaries and when you pass, these assets are passed on to the designated recipients instead of going through probate.

Other benefits of a living trust include:

  • Possible estate tax reduction (depending on what type of trust you establish).
  • Asset management for single or childless adults who later become incapacitated.
  • Hold money and assets for the benefit of minor children.
  • Manage inheritances for adult children who may not handle money wisely.
  • Keep information about your estate private. Unlike wills, trust details are not public record.

In this blog, we’ll review the differences between revocable and irrevocable living trusts and explain when each one might be appropriate for your estate planning goals.

Revocable Living Trusts

As its name indicates, revocable living trusts can be changed and even revoked during your lifetime. In that respect, it’s similar to a will, but where wills have to be probated, assets held in revocable living trusts are passed on quickly and without loss of privacy. You can serve as trustee yourself or appoint a third party. Once you pass, the trust becomes irrevocable, so you know that its terms will reflect your wishes.

Although revocable living trusts have their advantages, there are potential drawbacks that need to be taken into consideration.

  • There are no tax benefits. You are typically still responsible for any taxes earned on income from trust assets and you won’t save on estate taxes. You will still need other tax-reduction strategies.
  • There is no asset protection. Anything placed in the trust is legally treated as if it still belongs to you. This means that creditors can make claims against the property if you default on a debt or have a judgment against you.

Irrevocable Living Trusts

Unlike a revocable living trust, you no longer legally own the assets that you place into an irrevocable trust. For this reason, they may be used to avoid estate taxes on trust property after you pass.

Other benefits of an irrevocable living trust include:

  • It can lower your personal income tax liability by retaining the income generated by trust property, so if you have a lot of high-appreciating assets, the future inheritances of your beneficiaries may grow and pass on to them tax-free.
  • Assets in the trust are protected from creditors, so if you are sued, your loved ones won’t lose their inheritances.

In California, irrevocable living trusts are set up and treated differently from some other states. The primary differences are:

  • They can be modified under special circumstances or if all beneficiaries consent to the modification(s). This comparative flexibility makes it easier to revise your trust to comply with updated tax laws.
  • You are allowed to create split-interest trusts, which benefit different beneficiaries at different times. For example, a charitable remainder trust will pay your spouse a yearly income for a specified time, after which the remaining property goes to a charity of your choice.

A potential drawback is that you cannot serve as trustee, so be sure to name a family member or professional fiduciary that you trust to manage the assets properly and in the best interests of your beneficiaries.

Do You Need to Speak to a California Estate Planning Attorney?

Living trusts have major estate planning benefits but each person’s circumstances are different. At the Carroll Law Office, an experienced estate planning attorney will recommend solutions that protect your legacy and support your goals. To schedule a free initial consultation, call 707-536-1156 or contact us.

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