When you begin estate planning in California, one of the first things you likely will want to consider is the establishment of one or more trusts. These legal documents are effective vehicles for managing your financial assets and making sure that those assets and the income therefrom benefit you and your loved ones.
Per US News, you can choose from two basic types of trusts, revocable and irrevocable. As you might expect from their respective names, future revocability represents the fundamental difference between them. You can always change the provisions or a revocable trust, including revoking it, any time you wish. But once you create an irrevocable trust, you lock yourself into its provisions.
Revocable trust benefits
A revocable trust provides you with the following benefits:
- The assets in your trust will not need to go through probate when you die, making those assets more immediately available to your loved ones.
- You can maintain control over the trust assets if you name yourself as the trustee, and you can also name yourself as beneficiary of the trust if you so choose.
- You maintain maximum flexibility with regard to the trust assets because you can change any of its provisions at any time in the future, including its beneficiaries, trustees, income distribution methods and time tables, etc.
Revocable trusts, however, do have one major disadvantage. They cannot protect your assets from your creditors or from anyone else who sues you and obtains a judgment against you.
Irrevocable trust benefits
An irrevocable trust likewise provides you with benefits, including the following:
- No creditor can invade the trust to obtain payment of your debts, and no one who sues you can invade the trust to satisfy his or her judgment against you.
- You can continue to qualify for Medicaid and other governmental benefits for which you must meet strict ownership and/or income guidelines because the trust itself owns all the assets you place in it, thereby lowering both the number and value of your assets and your taxable income.
- You can significantly reduce your estate tax when you die since the trust itself, not you, owns the assets in it.
Obviously the major downside of an irrevocable trust is its irrevocability. Therefore, you need to be very sure about what you are doing and how your decisions will affect you both now and in the future before you establish one.
This is general educational information and not intended to provide legal advice.