California Irrevocable Trusts

An irrevocable trust can serve many purposes. It can provide for the well-being of future generations. It can be structured to safely hold separate property of either spouse or adult children. They are most commonly used to avoid probate and to take advantage of tax benefits. People generally associate the use of a trust with the wealthy. However, irrevocable trusts can be effectively used by those of more modest means as well. If you are interested in protecting your assets or decreasing your tax liability, you should contact an experienced trust attorney as soon as possible. Trust lawyers help clients from various financial standing achieve their goals through the careful and creative establishment of irrevocable trusts.

What is an Irrevocable Trust?

First, a trust is a legal relationship between the person who creates the trust (the trustor), the person who manages and makes disbursements from the trust (the trustee), and one or more persons who are named to receive the benefits from the trust (the beneficiaries). Trusts can be one of two types:

• Revocable trust: In this type of trust the trustor can terminate the trust and reclaim the trust property whenever he or she wants to. Unfortunately these trusts are not as safe as irrevocable trusts because the trustor retains full ownership and control rights and the assets can therefore be taxed or reached by creditors.
• Irrevocable trust: Once this type of trust is created, it cannot be changed or dissolved. The trustor cannot remove assets, change beneficiaries, or change the trust terms. An irrevocable trust can only be terminated with permission from the trustee and all of the beneficiaries, or from a judge. Although the trustor does not have full ownership or control rights, the assets are protected as described below.

What are the Benefits of an Irrevocable Trust?

An irrevocable trust provides benefits that a revocable trust cannot. Some of these benefits include the following:

• Asset protection: If a creditor receives a judgment against you, the creditor is entitled to seize and sell your property to satisfy the judgment. When property is transferred into an irrevocable trust, the trustor essentially gives up legal ownership and the assets cannot be touched by the creditor.
• Estate tax liability: When an asset is placed into an irrevocable trust, the assets and all the appreciation in value of those assets are not taxable. For example, a life insurance policy can be placed into an irrevocable life insurance trust where the insured names the trustee to be the owner and beneficiary of the policy. Ordinarily, a life insurance policy would be taxable in your estate if you owned the policy. But the trust holds the insurance to protect the death benefit from incurring estate tax. The proceeds would then be distributed to the beneficiary free of estate tax when the insured dies. Another example is called an AB trust where each spouse leaves his or her property to an irrevocable trust. The result is that the property can pass to the beneficiaries (usually their children) without being taxed.
• Income tax liability: An irrevocable trust can also be used to save income tax. For example, if you were in the 40 percent income tax bracket and you owned investment property that produced $100,000 in annual income, your taxes at 40 percent would be $40,000. However, if the property could be transferred to an irrevocable trust that fell in a lower 30 percent tax bracket, you would pay $30,000 in income taxes, saving $10,000.
• Avoidance of probate: When assets pass through a will, they can be held up in probate for many months. Assets distributed to beneficiaries are also subject to estate taxes and creditor claims. On the other hand, all property in an irrevocable trust can be dispersed immediately and is not subject to lawsuits, claims against the estate, or estate transfer taxes.

California Irrevocable Trust Attorneys

An irrevocable trust can provide some significant tax benefits, especially for trust property that earns an income. Contact a lawyer who has experience with irrevocable trusts if you would like to discuss your situation and find out whether an irrevocable trust would be beneficial to you. A good trust attorney has the expertise to structure trusts to achieve the goals of our clients and avoid taxation problems.