When you are making an estate plan that includes a trust, you could have to choose between forming a revocable or an irrevocable trust. California recognized both types of trusts, but they have different structures and different implications for your estate.
Revocable trusts are sometimes called living trusts, revocable inter vivos trusts, revocable trusts, or grantor trusts. When you create a revocable living trust, the legal trust document specifies that the settlor (the person forming the trust and putting assets in it) can revoke or modify the trust before his or her death. In other words, the settlor can decide that he does not want the trust anymore, or he can move whichever assets he wants into the trust. Revocable trusts allow for a lot of flexibility for settlors but less protection for the assets in trust.
Many revocable trusts have the settlor acting as the trustee during his or her lifetime. If the trust is still revocable when the settlor passes away, it could result in negative estate tax consequences. To avoid this, when the settlor passes away the trust document often requires that (1) the trust becomes irrevocable and (2) a successor trustee take over. This results in the assets not being part of the estate as described below.
In contrast to a revocable trust, the settlor cannot make changes to an irrevocable trust after he or she signs the trust document and places assets in trust. Instead, the trustee manages the assets even while the settlor is still living, to benefit the beneficiaries. The settlor loses all control over the assets, and the assets are no longer in his or her name.
As a result, these assets will not be part of the settlor’s estate when the estate is administered. This can be beneficial during the settlor’s lifetime as well. The settlor may be able to save on gift taxes or keep assets away from creditors.
Non-citizens, non-California residents, and their relatives may want to take advantage of all trusts can offer. Because the U.S. government and California have special laws about taxation of assets in both revocable and irrevocable trusts, and distributions to beneficiaries from them, speak to an estate planning attorney about your plans.
Planning to start a trust? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.