Estate planning is a comprehensive legal process that allocates your assets and property after you pass, establishes legal directives if you are unable to advocate for yourself, and ensures that you and your finances are protected as you age or if you become incapacitated. Although some people may assume that estate planning is something only for the wealthy, the truth is that everyone benefits from savvy estate planning and its legal and financial protections.
A trust is one of the most common estate plan documents, a versatile legal vehicle to protect and allocate assets. It can be irrevocable or revocable, and families caring for a loved one with special needs can also be created specifically for that scenario. The experienced and dedicated estate planning attorneys at Von Rock Law can help you learn more about revocable vs. irrevocable trusts and all of your legal options. Contact us today at (866) 720-0195 to get started and ensure your rights remain protected.
The Four Key Differences Between Revocable Vs. Irrevocable Trusts
Some people may find it beneficial to set up one type of trust, while others may use both types of trusts to accomplish their estate planning goals. The following are the four key differences between revocable and irrevocable trusts.
Whether the Trust May be Modified
The key difference between an irrevocable trust and a revocable trust is whether the owner may modify the trust after it has been established. Once the owners of the trust sign the documents and have them notarized, the trust is officially executed, and the terms are difficult, if not impossible, to modify.
A revocable, or “living trust,” allows the owner or trustee to change or alter, modify, or revoke the trust at a later date, with no need to give a reason. An irrevocable trust, on the other hand, is one with less flexibility as far as altering the terms or revoking the trust. Once assets have been placed in the trust and the papers are signed and notarized, the trust cannot be altered, modified, or ended, even if the trust owner or trustee changes their mind afterward.
Ownership of the Property and Assets in the Trust
The second difference between revocable and irrevocable trusts relates to the ownership of the trust’s assets. Assets in an irrevocable trust, including property and land deeds, bank accounts, artwork, or vehicles, belongs to the trust, not the owner who placed the property in the trust. The original owner no longer has control over the allocation or use of the trust’s assets.
The assets and property in a revocable trust also belong to the trust, and not the initial owner. The terms of a revocable trust may be altered at any time, and control and possession of the assets revert back to the initial owner. Therefore, the law views the trust creator as the legal owner (or having control over) the assets in the trust, even assets presently in the trust.
How the Trust Assets are Protected
As far as protecting assets, an irrevocable trust affords more protection for the assets it possesses than a revocable trust because the control over the assets permanently belongs to the trust and is directed by the trustee. Creditors often cannot touch the assets in an irrevocable trust, and these assets are typically shielded from probate in the state of California. To ensure your assets are properly protected, consider visiting with the experienced estate planning lawyers at Von Rock Law to learn all of your legal options.
Ownership and control over assets in a revocable trust can pass back to the owner, so they are always considered to have control over the contents of the trust. Therefore, creditors may be able to execute a petition for payment against the trust or place a debt lien on any property in the trust. By contrast, property in an irrevocable trust is almost always exempt from a creditor petition.
Federal Estate Tax Obligations
Not every state levies an estate tax, but the federal government does impose taxes, which could be of concern to some individuals or families. Couples whose estate is valued at more than $25,840,000 in 2023 are subject to federal estate taxes; if your family wishes to avoid paying federal taxes, then placing assets into a trust could reduce the value of the estate to avoid the tax. The key to doing this effectively differs between revocable vs. irrevocable trusts.
A revocable trust, because the owner may modify it, is typically not a legal vehicle to use if you wish to avoid federal estate taxes. Since the ownership of the contents is permanently transferred from the person establishing the trust to the trust itself, irrevocable trusts may be utilized to reduce a federal estate tax obligation.
Special Needs Trusts
If you have a minor child with special needs or provide for an adult relative with special needs, who cannot live fully independently, you may consider a third type of trust, a Special Needs Trust (SNT). This type of trust cannot be modified by the beneficiary, like an irrevocable trust. However, the creator of the trust may modify the trust to ensure that it still benefits the recipient. It’s used to help financially support people with special needs and pay for care or housing not covered in other ways.
Many people with special needs, both minors and adults rely on government benefits such as Medicaid, SSDI, subsidized housing, or SNAP food benefits. These are income-based benefits, and while they can cover most of the basics, many families wish to provide extra financial assistance for their special needs loved one. With a special needs trust, the individual may receive extra funds to pay for their housing or other quality-of-life enhancements.
Beneficiaries of a special needs trust cannot modify it, so from a legal standpoint, they are not considered to be in control of the assets. There are a few more stipulations for the SNT, but essentially, the restrictions of this trust mean that its contents are not considered income belonging to the beneficiary. Only the trust owner or trustee can modify the SNT.
Are You Considering Creating A Trust in the State of California?
Trusts, Last Will and Testaments, power-of-attorney documents, and other estate planning documents can protect your wishes for end-of-life care, provide financially for loved ones, and protect the assets you have worked hard for from excessive taxation. Von Rock Law, estate planning attorneys in San Francisco, CA, provide professional advice that will be tailored specifically to your situation in order to protect your legal and financial rights. Contact us today at (866) 720-0195 to schedule a consultation.