At Gallinger Law in Long Beach, CA we offer revocable and irrevocable trusts to protect our client’s estates. In this article, we will describe the differences between both legal documents so you can determine which one is more beneficial to you.
What Is A Trust?
Creating a road map for your assets and property can be done through a legal trust. This type of fiduciary arrangement allows you to manage and distribute your assets, either during your lifetime or after your death. As the grantor or creator of the trust, you are in charge of setting up the arrangement in which your assets will be held and managed by a third party or trustee. This trustee is responsible for making sure that your estate is handled according to your wishes. Trusts can be tailored to meet your individual needs, but all trusts can be classified as either revocable or irrevocable trusts.
Which Type of Trust Can Be Modified And Which Can Not?
The first major difference between revocable and irrevocable trust is whether the trust can be modified after it is created and executed. With a revocable trust, the grantor has the ability to alter, change, modify, or even fully revoke the trust at a later time. On the other hand, an irrevocable trust is one that becomes concrete once signed and funded and cannot be altered, changed, or modified after it becomes effective. This is true even if a grantor changes their mind later.
Did You Know That Ownership Of Your Property Can Change With Irrevocable Trusts?
The second big difference between revocable and irrevocable trusts has to do with who owns the property of the trust. With an irrevocable trust, the individual who previously owned those assets no longer has any ownership interest or even control over that property outside of the trust. The trust becomes the owner of the property.
When it comes to a revocable trust, it is quite the opposite. These types of trusts can be altered at any time, and the law considers the person who created the trust to still have ownership or control over the assets, as well as the power to revoke the trust.
Why Are Irrevocable and Revocable Trusts Taxed Differently?
When it comes to the protection of assets, an irrevocable trust is better than a revocable trust. An irrevocable trust can protect assets from judgments and creditors. Assets in an irrevocable trust are not considered personal property. This means they are not included when the IRS values your estate to determine if taxes are owed. And, if you file bankruptcy or default on a debt, assets in an irrevocable trust would not be included in bankruptcy or other court proceedings. Such trusts can be especially helpful in reducing the tax liability of very large estates.
On the contrary, revocable trusts are the simplest trust arrangement from an income tax standpoint. Any income generated by a revocable trust is taxable to the trust’s creator during their lifetime. This is because the trust’s creator remains in full control over the terms of the trust and the assets contained within it. If the creator owes money when they pass away, creditors can access their trust’s assets to pay off those debts.
Would I Benefit From A Trust?
The type of trust that is right for you will depend on your situation. An experienced attorney will be able to guide you through the process of opening the adequate trust correctly. Trusts can be beneficial for all sizes of estates. Setting up a trust can be complicated. If you want to create one and have questions about the process, consider reaching out to Gallinger Law for a consultation today. Call 888-255-9147 to make an appointment.