There are a number of misconceptions that circulate about certain aspects of the estate planning process, and some of them are related to trusts. One of these notions is the idea that you cannot change your mind and dissolve a trust once it has been created.
In this post, we will provide clarity so you can go forward with a more complete understanding of the subject.
The idea that a trust cannot be revoked is a partial truth. There are irrevocable trusts, but there is also the revocable living trust. Why would you use a trust that you cannot revoke if you have a safer option?
In the legal realm, there is a concept called “incidents of ownership.” If you establish an irrevocable trust, in many cases you cannot act as the trustee, so you would relinquish personal control of the assets.
You would be surrendering incidents of ownership, and this can be beneficial when certain circumstances exist. For example, the portion of an estate that exceeds $12.92 million is subject to the federal estate tax and its 40 percent top rate.
Assets that are held by an irrevocable trust would not be counted for estate tax purposes, and tax efficiency trusts facilitate transfers at a tax discount.
Clearly, a small percentage of families are exposed to this tax, but there are other applications. When some circumstances exist, removing assets from your name can be beneficial, and there are irrevocable trusts that can satisfy targeted objectives.
Changing an Irrevocable Trust
Generally speaking, you cannot change an irrevocable trust, but there are some exceptions. Some irrevocable trusts allow for modifications under very limited, specific circumstances.
It is also possible to give the trustee or the beneficiaries a lifetime special power of appointment that would allow for changes.
An irrevocable trust could include a provision that would allow for an independent trust protector to consider proposed changes to the terms.
Revocable Living Trust
The other type of trust is the revocable living trust. As the name would indicate, you can dissolve this type of trust, and it becomes active when you are still living. As the grantor of the trust, you would act as the trustee, so you would have total control of the assets every step of the way.
However, the assets in the trust would be part of your taxable estate. Plus, while you are living assets in the trust would be in play if you are the target of a lawsuit.
What are the benefits? If you use a will to state your final wishes, it would be admitted to probate, which is a costly and time-consuming legal process. The probate court is not involved when assets are being distributed through the terms of a living trust.
You could include spendthrift protections for the beneficiaries when you have a living trust, and you can name a disability trustee to administer the trust in the event of your incapacity.
With regard to asset protection, interestingly enough, a revocable living trust with a spendthrift clause will become irrevocable after your death. The beneficiaries would not be able to directly access the assets. Creditors of the beneficiaries would “step into their shoes,” and they would have the same access, which is none.
Attend a Free Webinar!
We conduct webinars on an ongoing basis to provide learning opportunities for our neighbors. There is no charge, and they couldn’t be any more convenient, so this is a great way to invest a little bit of spare time.
You can see the dates if you visit our webinar page, and when you identify the session you would like to attend, follow the simple instructions to register.
Need Help Now?
If you are ready to work with a Burbank, CA estate planning attorney to put a plan in place, we are here to help. You can send us a message to request a consultation appointment, and we can be reached by phone at 818-937-2335.