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Understanding Irrevocable Trusts

Bochnewich June 13, 2023

A trust is an important tool in estate planning used to manage assets and outline distribution stipulations. Assets such as real estate, bank accounts and other items of monetary value are transferred into the trust. With an irrevocable trust, the person who creates the trust — known as the grantor — gives up control and ownership of the property upon execution of the document. The transfer is permanent and modifications are not allowed in most states. However, irrevocable trusts executed in Palm Desert, California, with the help of a qualified attorney, may be amended under specific circumstances.

Irrevocable trusts should not be confused with revocable trusts. The latter type allows the grantor to make changes for any reason. The grantor can also revoke the trust altogether. Revocable trusts generally become irrevocable trusts upon the grantor’s death. While irrevocable trusts are not as flexible as revocable trusts, there are many benefits of selecting the irrevocable type.

Types of Irrevocable Trusts

There are two types of irrevocable trusts: living and testamentary. An irrevocable living trust is executed and activated while you are alive. Assets do not go through the probate process when transferred to an irrevocable living trust. These trusts can include several different components, including lifetime access trusts, charitable trusts, annuity trusts and insurance trusts.

On the other hand, testamentary trusts are executed while you are still living but are only activated after you pass away. Assets placed into this type of trust may be subject to the probate process. Whether the assets are exempt from probate is determined by the terms of your will.

Benefits of Irrevocable Trusts

Despite its inflexibility, an irrevocable trust offers certain benefits that make it an attractive option in some circumstances. In addition to providing a legally binding agreement that preserves your assets upon your passing, this type of trust has the following advantages:

Protection from lawsuits: Some individuals are more likely to be sued than others. Business owners in certain industries, physicians and attorneys often choose to protect their assets by transferring them into a trust. Even if you are subject to a judgment or court order, you cannot lose assets that are placed into an irrevocable trust. Even lenders cannot seize assets in this type of trust.

Less estate tax: Generally, individuals who have a lot of assets benefit the most from choosing an irrevocable trust. U.S. tax law dictates that certain taxpayers must pay a federal estate tax fee of 40% for distributing assets to beneficiaries. However, assets in an irrevocable trust are exempt from estate taxes.

While there are many advantages to irrevocable trusts, there are a few disadvantages as well. The major disadvantage is that you lose control of your assets as soon as you execute the trust. You are unable to continue managing the assets after they are transferred to the trust and you are unable to reclaim them for any reason.

Split-Interest Irrevocable Trusts

California is one of the U.S. states that allow residents to execute split-interest trusts. A split-interest trust, also referred to as a charitable remainder trust, is a type of irrevocable trust in which assets are dispersed to two parties at different times. First, income is distributed to the beneficiary or beneficiaries named in the trust. The trust outlines in which circumstances the assets should be distributed. Once the assets intended for the beneficiaries have been exhausted, the remainder of the trust is donated to a designated charitable foundation.

The charity receives the remainder of the trust after a specific period as outlined in the trust document. In simple terms, present interest is with the beneficiary and the remaining assets are given to the charitable cause. There are several benefits of choosing a split-interest trust:

  • Eliminate or decrease capital gains taxes

  • Increase income

  • Reduce federal estate taxes

Split-interest trusts are becoming popular among many Palm Desert, California, residents. They are a good way to continue supporting charitable causes you are passionate about after you pass away.

Modifications Allowed by California Law

Some jurisdictions do not allow grantors to make any changes to a trust once it has been executed. California law, however, allows grantors to make modifications under specific conditions. These circumstances must be extraordinary and are not permitted in all situations.

Generally, all beneficiaries must agree to the modification. Some courts allow modifications if one beneficiary and the grantor agree to the changes. The beneficiaries must petition the court to make changes to the trust. A California probate court judge must approve the modification. A court will often approve an amendment when the assets in the trust can no longer support the maintenance of the estate. Trusts can also be changed to conform with changing tax laws.

The Role of The Trustee

The grantor names an individual or entity to act as the trustee of the irrevocable trust. The trustee is responsible for managing the trust’s assets and making distributions according to the grantor’s wishes. In some cases, the grantor can also act as the trustee. However, the grantor cannot act as the trustee for irrevocable trusts. Instead, a trustee is selected to manage the estate’s assets according to instructions outlined in the trust document.

Some grantors choose a friend or family member to act as a trustee. Others choose a lawyer as the trustee. Although the courts cannot oversee all of the actions of a trustee, they are still held to a high standard. Courts expect trustees to be unbiased and trustworthy and to act in a manner that protects the assets of the estate. Trustees are also expected to keep accurate records and act in the best interests of the beneficiaries and the grantor.

Call Bochnewich Law Offices for Assistance

If you are searching for an experienced irrevocable trust lawyer in Palm Desert, California, contact Bochnewich Law Offices. Our attorneys are well-versed in complex California trust laws and can provide you with the best advice possible. Whether you are interested in establishing a split-interest trust or you have a trust litigation concern, we can provide you with assistance. Contact us to discuss your options or to schedule a free consultation.