IRREVOCABLE TRUST AND TYPES OF IRREVOCABLE TRUSTS
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Originally Posted On: Irrevocable Trust In California – What You Should Know! (hessverdon.com)
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There are many types of trust funds, including the following:
- Life Insurance Trust
- Charitable Trust
- Generation-Skipping Trust
- Qualified Personal Residence Trust
- Spousal Lifetime Access Trust, among others.
These types of Trusts can be categorized as either Living or Testamentary.
A Living trust provides for the grantor until they die, after which the asset goes to their beneficiaries. The grantor has a successor trustee who is responsible for transferring the assets. On the flip side, a testamentary trust is a Will specifying how a person’s assets are designated following the person’s death.
Living trusts: Revocable or Irrevocable
Irrevocable vs. Revocable Trust
Irrevocable and revocable trusts are the most common categories of trusts employed in estate planning to avoid probate hassles and expenses. But these two categories of Trust aren’t the same at all.
What is an irrevocable trust?
An irrevocable trust is a permanent trust unless one or more of the Trustor’s named beneficiaries decides otherwise. When setting up an irrevocable trust, the grantor effectively transfers all ownership of properties into Trust and ceases control over them and the Trust.
Therefore, an irrevocable trust cannot be changed or terminated without the Trustor’s named beneficiary’s permission. It is the very opposite of a revocable trust.
In a revocable trust, the grantor retains control over the trust assets and can change the Trust during their lifetime.
1. Revocable trusts don’t keep assets from creditors.
If you take the hassle of setting up a trust to hold your assets, you should surely think of keeping those assets safe from creditors, too. While a revocable trust is the category of Trust an attorney might recommend to hold your properties and money, it’s not the best kind of Trust to safeguard your assets from creditors.
When you create a typical revocable living trust to avoid probate, you will name yourself the trustee. That allows you to retain rights of ownership to the assets in the Trust. You can put and take property from the Trust anytime without any restriction. You can even sell or gift it away if you like because the property is yours in perpetuity.
But that also means your creditors can get to the properties by filing a legal claim. The court will treat you as the property owner because if you revoke the Trust, the assets will end up in your name. The wealth generated by a revocable living trust is also taxed as personal income. During your lifetime, the Trust won’t be treated as an isolated tax-paying entity.
2. Irrevocable trusts safeguard assets from creditors.
Creditors can’t claim assets in an irrevocable trust. The reason being that you don’t control the assets, can’t revoke the Trust, and therefore can’t be considered the owner of the assets.
How does an irrevocable living trust work?
An irrevocable trust is created to reduce taxes and avoid probate. When you set up an irrevocable trust, you lose all ownership incidents, but this also takes the assets in the Trust off your taxable estate. The income produced by assets in an irrevocable trust is not subject to personal income tax.
Modern irrevocable trust rules are even better. Unlike older irrevocable trusts, some provisions allow for significant flexibility in modern trust management and administration. Now, you can even move an older trust to a newer trust with current provisions that allow for effective assets management. There is also the option to change a trust’s domicile state and save more on taxes and other benefits.
However, tax rules vary by jurisdiction, and in a lot of cases, you won’t be allowed the wealth if you are both the grantor and trustee.
Items that can go into an irrevocable trust include:
- Investment assets
- Life insurance policies
However, creating a trust is not straightforward; you need the help of an attorney familiar with trusts, wills, and estate planning. Most people think of trusts as tools for the wealthy. However, trusts are useful in estate planning whether you are rich or of modest means.
Who should use an irrevocable trust?
Irrevocable trusts come in handy for individuals working in fields that make them prone to lawsuits, such as medical and legal practitioners. Once you move your asset into an irrevocable trust, it’s protected from creditors and court judgments. An irrevocable trust can also serve to protect beneficiaries with special needs, making them eligible for government benefits, unlike if they inherited properties outright.
Types of Irrevocable Trusts
Irrevocable trusts can be either living or testamentary trusts. Living trusts are created and funded by a person until they die.
Examples of living trusts are:
- Life insurance trust
- Charitable remainder trust
- Qualified personal Trust
- Spousal lifetime access trust
Is it possible to alter an irrevocable trust?
Irrevocable trusts can be undone under certain conditions. Most jurisdictions have legal options one can take to change such types of trusts. It usually takes the consent of all named beneficiaries and should be of legal age. Some irrevocable trust deeds even give the trustee power to modify the Trust due to unforeseen circumstances, but it should be in the beneficiary’s best interest.
The best kind of Trust for keeping one’s assets safe from creditors and court judgments is an irrevocable trust; once created, the grantor cannot change it. Irrevocable trusts provide tax benefits, and you will still be eligible for Medicare, Supplemental Security Income, and other government benefits.
Do you need help with an irrevocable trust? We are experienced trust attorneys in California. Indeed, we have worked with trustors, trustees, and beneficiaries, providing information, advice, and legal representation in matters involving trusts. Get in touch with us to get the help you need.