In the first article, we examined. Now it is time to dive into the more potent, yet rarely used, irrevocable trust as a tool for estate planning and asset protection. In this article, you will learn:
- The difference between these two key trust tools for estate planning.
- The advantages of an irrevocable trust in terms of estate planning in California.
- How your estate planning attorney can help you use an irrevocable trust for asset protection.
What Is An Irrevocable Trust, And How Does It Differ From A Revocable Living Trust?
Trusts are estate planning and asset protection tools that allow you to transfer assets out of your name and into the ownership of the legal entity that is the trust. Depending on how it is set up, it will have different characteristics and restrictions.
As the name suggests, an irrevocable trust cannot be revoked; that is to say, it cannot be changed or dismantled once you establish it. After that point, it is locked in. There is almost no little flexibility for modifying or terminating an irrevocable trust. While there are minimal exceptions, they are almost never approved.
The irrevocable trust also starts out with its own tax ID number. In that way, you could essentially compare it to a separate business entity like an LLC or a corporation. It operates independently of the person creating the trust (aka the settler) because it is not tied to their social security number and has its own tax ID.
As a result, it can provide some serious benefits for tax planning and creditor protection if done in the right way. But it also eliminates the control that someone establishing it would have over the assets and the trust, especially when compared to a revocable living trust.
Additionally, you typically need a third party to be the managing trustee of an irrevocable trust for you. If you are still in control, on paper, of an irrevocable trust, that undermines most of those benefits.
Trusts are thus a full range between revocable trusts that offer maximum control and flexibility but no credit or protection and very limited tax planning benefits; and irrevocable trusts on the other end, for which you give up control and gain more protection and benefits.
What Are The Primary Advantages Of Establishing An Irrevocable Trust For Estate Planning, Asset Protection, And Other Purposes?
Depending on how the trust is set up, you can lock in the value of an asset if you transfer it or gift it to an irrevocable trust at a lower value and still get the benefit of the increased value over time.
An irrevocable trust also protects against creditors. As the assets are no longer in your name, it is difficult for creditors to get their hands on them.
There are also other advantages if, for example, you are in a second marriage with a blended family. If you want assurance that a certain amount of assets will go to your children regardless of what happens in the marriage, an irrevocable trust is one way to lock in a certain amount of funds for them.
For example, if you have a $2 million estate, get remarried, but want to ensure at least a million dollars goes to your kids, you could put a million in an irrevocable trust for their benefit. This offers greater security than if everything was set up for the spouse, who could then change the distribution or beneficiaries after your death.
Therefore, the advantages of irrevocable trusts are threefold: better protection, tax planning, and additional estate planning options and assurances.
How Does An Irrevocable Trust Help Protect Assets From Creditors And Legal Claims?
When you create an irrevocable trust, you are guaranteed a certain degree of protection because you are giving up control and ownership of the assets placed in it.
On the other hand, if you have an asset in a revocable trust that you own, you still have full access. You can sell it, take the proceeds, earn income off the assets, and so forth. An irrevocable trust is like giving an asset to a separate entity, such as a Limited Liability Corporation (LLC). But in return, you gain similar protections.
For example, consider a rental property you bought but transferred to an LLC to rent. Suppose a tenant in the rental property gets injured or sues you. In that case, they have to sue the title owner of that property rather than you, greatly limiting your liability as they cannot sue you personally.
Assets in an irrevocable trust work the same way. If they are in an irrevocable trust, anyone who is after them, such as a creditor, would have to sue the trust itself, which provides those protections. Whereas if they only sued you, they would not be able to reach the assets in that irrevocable trust.
However, under very limited exceptions, creditors may be able to reach those assets. They can do so only if they can prove that the assets were put into the irrevocable trust just as a way to avoid the creditor or a known liability. If you try to hide assets after a procedure has begun or in full knowledge of a specific liability, sometimes the courts will pierce those protections and hand over the assets.
Setting up an irrevocable trust well beforehand, however, especially if you know you might be at risk in the future, is a great way to protect your assets from creditors and liability.
What Types Of Assets Can Be Included In An Irrevocable Trust?
Virtually any type of asset can be included, though it will not always be optimal to do so with every kind. Homes and other kinds of property, investments, bank accounts, vehicles, business interests, and more can all be included.
You will not typically want to include some assets because you would have to retitle them. These include tax-deferred investments and most life insurance policies because those will pass directly to the named beneficiaries on those policies or accounts. This would make retitling them expensive (in terms of taxes) and impractical (in terms of estate planning).
If you are unsure about how to organize your assets into one or more trusts, or are considering setting up an irrevocable trust to protect your assets or estate, it is best to do so with the assistance of experienced estate planning attorneys.
For more information on Using An Irrevocable Trust In An Estate Plan, a free initial consultation is your next best step. Get the information and legal answers you are seeking by calling (951) 262-8811 today.
Call Us For A Free Assessment Of Your Needs
(951) 262-8811
