If you’ve been thinking about creating an Estate Plan (and everyone should,) you’ve probably heard about Trusts. These financial entities can be set up for a variety of purposes, but practically all of them are designed to protect, manage, and ultimately distribute your wealth. You can use them to hold assets like real estate, investment accounts, and life insurance, and distribute them to beneficiaries after you pass.
In this blog, we’ll review two common Trusts: Revocable and Irrevocable. Each one has its own advantages and disadvantages, and understanding your estate planning goals will help you make the right decision.
As its name suggests, a Revocable Trust can be amended or even revoked by the person who created it (the grantor). Any income earned by Trust assets goes to you (and is taxable) and the assets don’t go to your beneficiaries until you pass.
One of the biggest advantages of a Revocable Trust is that unlike a Will, the contents can be distributed after your death without having to go through a lengthy and expensive probate first. You can also appoint a Durable Power of Attorney to oversee the Trust and your financial affairs should you become incapacitated, which provides peace of mind for you and your beneficiaries.
If your main goal is to plan for incapacity, a Revocable Trust will meet your needs. You’ll want to make sure that it includes a Durable Power of Attorney designation, healthcare directive, and even pour-over will to provide the most protection.
If your goal is to obtain tax benefits or protect your estate from creditors, a Revocable Trust won’t work. Since you retain control over the assets and can modify the trust at any time, you won’t be eligible for most state and federal income tax benefits and creditors can access its contents to satisfy a claim against you.
With an Irrevocable Trust, you can’t easily make changes once it’s set up, and usually need the consent of your beneficiaries to do so. In addition, you no longer have control of assets once they’re transferred into the Trust.
Many people set up an Irrevocable Trust to obtain a tax benefit. The contents of the Trust don’t add to the value of your estate, so if you’ve amassed a lot of wealth, it won’t be eroded by taxes. You can implement various income or Estate and Gift Planning strategies while saving on taxes.
Irrevocable Trusts are also appealing because they can protect your estate from creditors and judgments. If you own a business in an industry that’s subject to lawsuits, this added security is invaluable.
If you want to ensure access to means-tested government benefits like Medicare and Supplemental Security income, an Irrevocable Trust can help you qualify without having to deplete your wealth first, ensuring that your loved ones will still have an inheritance.
For some people, the idea that they can’t change the trust once it’s finalized may be unsettling. Other disadvantages include higher tax rates for Trust income and the need to file a separate tax return.
Talk To an Estate Planning Attorney Today
Both types of Trusts have benefits and drawbacks, making it tricky to determine which one is right for you. This is where speaking to a California estate planning attorney can help.
At Solan, Park & Robello, we provide an extensive range of services that include Trust setup and administration. We will meet with you, make recommendations that support your Estate Planning goals, and help you set up a Trust that supports the future you want. For more information or to schedule a consultation, contact us today!
Solan, Park & Robello
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