You have probably seen someone– a non-lawyer likely– selling living trusts, offering numerous promises, including “saving money,” avoiding probate, and reducing or avoiding taxes. Some salespeople will say that living trusts ensure privacy or can be used to prevent actions by creditors, including the government and health care providers. There are even trust “mills” that pump out trusts with little to no regard for the actual needs and desires of clients. It is imperative to make sure that you hire an expert to achieve your objectives. Attorneys have studied trusts in law school, know the place of trusts in an estate plan, and can provide a holistic solution for their clients that consider all of the circumstances of the household. Below, we will discuss the differences between revocable and irrevocable trusts and how a proper lawyer can help you achieve the goals mentioned with the correct legal instrument.
Trusts are not just for the top 1%
Trusts are appropriate for many people, have been significantly developed in the law and have become part of the mainstream estate plan. The benefits are real and justify the relatively modest costs. The COVID-19 pandemic has affected virtually everyone, leading many to turn to estate plans earlier in life to ensure that their assets are protected and will be available for future generations.
What is a Trust?
A trust is created by an instrument that allows a “Trustee” to hold assets on behalf of a party (a “Beneficiary.”) The assets are put into the trust by a “Grantor.” Trusts can be set up in a myriad of ways. Aside from the types discussed today, there are Testamentary Trusts, Qualified Terminable Interest Property (QTIP) Trusts, Charitable Remainder Trusts, Generation-skipping Trusts, Grantor Retained Annuity Trusts, etc. The main feature of a trust is that it dictates when and how assets are distributed to beneficiaries. As one would hope, you can be very precise with controlling when and to whom assets are conveyed. This has become an important feature as more and more families are of the blended variety. Because the assets are held by the trustee, depending on location, they are generally not probated.
A Living Trust
This type of trust has the feature that while the Grantor is alive, she can control the assets of the trust. She can name herself or someone she trusts as the Trustee. Co-trustees and successor Trustees can be named, as well. The trust can be dissolved at any time, up until the time when the Grantor passes. At that point, it becomes an irrevocable trust. One major benefit of this trust is that it will keep assets out of probate. In California, estates of a certain size need to go through a court-controlled probate process that is time-consuming and costly. A trust can also disincentivize beneficiaries from contesting the estate. Assets in the trust are managed by the trustee, so if the grantor has capacity issues, these assets may not need to be conserved initially.
The important distinction is not between living and revocable trusts, because they are for most intents and purposes the same, but between revocable and irrevocable trusts.
The unique feature of an irrevocable trust is that it moves the assets out of the grantor’s hands irrevocably. Essentially, she will lose control of the trust because the trust cannot be altered by the grantor after it has been executed. The Grantor will not be subject to income and estate taxes generated by the assets. The assets will also be protected against a legal judgment against the Grantor and will not be probated. Thus, there are important benefits gained that offset the loss of control. If you want to maximize the economic protection of a trust, perhaps this trust is your choice.
With this type of trust, you can revoke, or change, the trust at any moment in your lifetime. You would be able to change, for instance, the amount of assets distributed to beneficiaries, or who the beneficiaries are. The advantage of this type of trust is that the assets within it are accessible to you during your lifetime and yet the trust indicates how they will be disbursed after you pass. This is beneficial for many reasons, including protecting the estate when beneficiaries may not have learned money management skills. However, in a revocable trust, you do not have some of the benefits of the irrevocable trust, including the shield against creditors. They do not save you income or estate taxes if the state treats the trust assets as the grantor’s property. If complete control of your trust assets while you are alive is important to you, this is a better choice for you.
Picking the Right Trust for You
As you may have concluded by now, choosing the right type of trust depends on your individual circumstances and your objectives. For many people, clarifying objectives is not an easy task, especially the first time around. Many questions come up that have not been thought about before. Outlining roughly what you want to happen is sufficient because when you meet with an attorney to draft the trust, the level of detail needed may change. The attorney can assist by asking questions and providing legal advice to make the process easy.
In this unpredictable economic and political atmosphere, it is best to do what you can to create certainty and reduce risk. Revocable and irrevocable trusts are likely an essential component of your estate plan to maximize asset protection and minimize taxes. Please do not hesitate to contact one of our experienced lawyers for legal advice. Call the trusted estate planning attorneys at Lowthorp, Richards, McMillan, Miller & Templeman at (805) 981-8555 or fill out our online contact form. We operate primarily in the Tri-Counties area – Ventura, Santa Barbara, and San Luis Obispo.