Planning For A Secure Future

Revocable and irrevocable trusts compared

On Behalf of | Aug 12, 2022 | Trusts

Broadly speaking, there are two main categories of trust that people in California can use in estate planning. These are revocable trusts, also referred to as “living trusts,” and irrevocable trusts. The most obvious difference between these two kinds of trusts is that irrevocable trusts cannot be modified after they are established while revocable trusts can.

What is a trust?

A trust is a legal structure whereby a person, called “the grantor,” gives over control of assets to another person, called “the trustee.” The assets are held in trust, and the trustee must follow the rules of the trust in holding, investing or distributing the assets. The trust must also name at least one beneficiary, who is the person on whose behalf the assets are held. Trusts often have multiple beneficiaries. In short, through a trust, the grantor gives up ownership of certain assets, which can provide taxation and estate planning advantages.

Revocable trust versus irrevocable trust

The primary advantage of a revocable trust is that you, as the grantor, can keep managing and using your assets after the trust is formed. There are formalities required if you want to modify the trust, but you can change beneficiaries or alter the way that the assets are managed.

The major disadvantages of a revocable trust are that creditors may still be able to reach trust assets in collections actions, and assets in revocable trusts may still be counted for federal estate tax purposes. Both types of trust avoid probate, however.

Irrevocable trusts cannot be modified once they have been established. This means giving the trust total control over the assets therein. With that disadvantage come the advantages of protection from federal estate taxes and protection from creditors. Because the grantor gives up control of the assets, they cannot be reached by these entities. So if the value of your assets is more than the exemption for estate taxes, an irrevocable trust might be the right answer.