A trust is a structure that one can set up and use to manage his or her assets. It is set up by a person to ensure that the assets are properly transferred to intended beneficiaries, without the hassle and expense of going through probate court. For someone with a business, it can be a great way to ensure that business is successfully transitioned to the next generation.
The assets inside of a trust are managed by a third party which is the trustee (however, the owner who sets up a revocable living rust is typically the initial trustee and will manage his or her trust assets until death or incapacity). After the owner of the trust dies, the trustee must manage the trust in the best interest of the owner and has a fiduciary duty to act in the best interests of the beneficiaries of the trust.
When someone decides to create a trust, they have the choice between a revocable trust and an irrevocable trust. They both have their pros and cons which is why we explain them in detail below to help you make the right decision.
Revocable Trust vs. Irrevocable Trust:
The main difference between a revocable trust and an irrevocable trust is that the revocable trust can be changed at any time (revoked, amended, destroyed, you name it). Trusts like these are also commonly called a living trust, or revocable living trust.
An irrevocable trust on the other hand can’t be modified without the consent of the beneficiaries, or petitioning the court to modify the trust under a theory such as “changed circumstances” (for example, a change in the tax law). Thus, even with an irrevocable trust, options are available to change the terms, but it is a lot harder to modify an irrevocable trust compared with a revocable trust.
What Else You Need To Know About Revocable Trusts
- You can manage the trust yourself and you do not need to get any third party involved to be the trustee.
- Assets in this type of trust are not shielded from creditors.
- No separate tax ID or EIN is necessary, and income from trust assets can be reported using your social security number.
What Else You Need To Know About Irrevocable Trusts
- They are used for a variety of purposes (reducing estate taxes, taking advantage of the annual gift tax exemption through a gifting trust, ensuring that children on government benefits (SSI, medi-cal) do not lose their government benefits through a special needs trust).
- Irrevocable trusts are shielded from creditors
- Irrevocable trusts are taxed at a very high level, so it is important for the trustee to distribute trust income in an irrevocable trust to the beneficiary and not let the income accumulate in the trust and be taxed at a high bracket.
Which Is Better a Revocable Trust or Irrevocable Trust?
As we have seen in the sections above, there are some significant differences between a revocable and irrevocable trust. So, which one is better?
One isn’t necessarily better than the other, as they both have their advantages and disadvantages.
While the revocable trust offers more flexibility, the irrevocable trust offers certain advantages such as creditor protection.
If you want to manage the trust yourself and feel like you may want to modify your trust in the future, it would make sense to go for a revocable trust. In fact, for 99% of the population, revocable trusts make the most sense.
However, if you are dealing with a special situation such as a child with government benefits (SSI, or medi-cal), and you want to make sure that the inheritance you leave to your child will not jeopardize their government benefits, then an irrevocable trust would be most appropriate.
Speak To a Living Trust Lawyer
If you are in doubt of which type of trust is best for you, it would make sense to speak to a living trust lawyer in California. Klosek Law Offices & Jack Klosek is the trust lawyer who will help explain all of your estate planning options.