A Professional Law CorporationThe Advantages of an Irrevocable Trust Outweigh the Disadvantages
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What is an Irrevocable Trust
An irrevocable trust is a type of trust vehicle where it’s terms are not modifiable, amended, or terminated without the permission of the Grantor and the named beneficiary and heirs.
In an irrevocable Trust, the Grantor transfers ownership of their assets into the irrevocable Trust. By moving the assets, it legally removes them of the rights of ownership to the assets within the Trust.
Irrevocable Trust Disadvantages
When it comes to irrevocable Trust disadvantages, you will want to match it up with the advantages of an irrevocable trust as well.
Like all things, there are disadvantages, but let’s review them to see if the advantages outweigh the disadvantages of a Trust.
Some of the irrevocable trust disadvantages for California residents include:
· Irrevocable trusts cannot be changed; assets put in them cannot be removed
· The trust has an inflexible structure, unlike revocable trusts
· Assets may revert back to the estate if the grantor dies before the trust term matures
· The trust attracts federal income tax if it earns more than $600 in a year
Pros and Cons of Irrevocable Trust
Reviewing the discussions upon the disadvantages of an irrevocable trust, we need to look at it from the perspective of the people who are part of a Trust. The people who are part of the Trust are the following: Trustor, Trustee, Beneficiary, and Heir.
So, if one were to state the primary disadvantage of an irrevocable trust it is that once the assets are added into the Trust, the Trustor/Grantor no longer has access to the estate assets.
Now, like anything else, you can build in measures to retrieve the assets should wrongdoing, lack of funds in the estate, etc., would take place.
The objective to set up an irrevocable trust, in which they are many, is that the assets are no longer in the Trustor/Grantor’s name. So the disadvantage of an irrevocable trust is the reason why people choose to have this type of Trust vehicle!
Now, if you have stocks or a business that is achieving up and above its financial projections, you will likely be in a higher tax bracket. A higher tax bracket can hurt you in the long run, and it may behoove you to study what type of irrevocable Trust you can leverage to your advantage.
So again, lowering your tax liability is the advantage!
So, the list below are some more disadvantages of an irrevocable trust:
- Loss of Control over Assets
- Inflexible as opposed to a Revocable Trust
- Unforeseen circumstances
- IRS rules state if you die within three years, assets transfer back to the estate.
- Extra complications: If the Trust earns more than 600.00 in income in a tax year, the Trustee should file and pay federal income taxes at the Trust’s tax rate.
- An Irrevocable Trust is a separate tax entity, so, therefore, check your state to see if you are obligated to file a gift tax return with the IRS.
Now don’t let the “perceived” cons of an irrevocable Trust persuade you not to use this type of estate planning vehicle.
Consult with your estate planning attorney who focuses on advanced estate planning, i.e., Irrevocable Trusts and the type in which you need for your circumstance.
Can an irrevocable trust ever be changed?
Now, there are special circumstances that an irrevocable trust can be changed but calls for a trust lawyer to help in the following:
- Everyone who is listed in the trust, i.e., beneficiaries, heirs, etc. should unanimously consent to the trust being modified or terminated. Under California Probate Code section 15404(a), if all of a trust’s settlors and beneficiaries unanimously approved amendment or termination of the trust, they can do it without court approval.
- If no unanimous consent from the beneficiaries, a trustee may ask the court to modify or terminate if the continuation of the trust would defeat or impair the spirit in which the trust was established. A petition to the court to modify or terminate an irrevocable trust under the “changed circumstances doctrine”.
Note: There may be tax implications.
If you live in California, our Orange County Trust Attorney law firm will assist in the needed documentation.
Just one note, however, if there is no unanimous decision, the probate court will have the final say.
What are some examples in which an irrevocable trust has been modified and/or terminated?
First, the irrevocable trust should be drafted with certain provisions that allow for modifications under special circumstances.
Some scenarios are listed below:
- When the principal has become too low to support the administration.
- When a change in tax laws becomes necessary.
- Charity named as the beneficiary has changed its structure
- And many others.
Our advice, please contact one of our Orange County Estate Planning Attorneys. We are open to assist you with a second opinion review of your case.
Are irrevocable trusts public record in California?
In California, if a trust does not hold real estate property, then all assets held in the name of the trust are kept private.
If however, once a record of a real estate transfer is made, all the details of the deal, i.e., the price, transfer dates, etc., become public records and are recorded with the county clerk.
Should you have any questions regarding an irrevocable trust, feel free to call Hess-Verdon & Associates.
- Charitable Remainder Trust (CRT)
- Grantor Retained Annuity Trust (GRAT)
- Qualified Personal Residence Trust (QTIP)
- Learn more on estate planning.
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