Irrevocable vs. Revocable Living Trusts

As a Folsom lawyer who specializes in estate planning, one of the most common questions that I am asked is whether the client should set up an irrevocable or revocable living trust.  These are two common types of trusts used in estate planning, each with their own characteristics and purposes. Here is a comparison of the two:

Revocable Living Trust

1. Flexibility: The primary advantage of a revocable living trust is its flexibility. You, as the creator (known as a “trustor” in California) of the trust, can make changes or revoke it entirely at any time during your lifetime.
2. Control: You retain complete control over the assets placed in the trust. You can manage, invest and use these assets just as you would if they were not in the trust.
3. Probate Avoidance: A significant benefit of a revocable living trust is that it helps your assets avoid probate. When you pass away, the assets held in the trust can be distributed to beneficiaries without going through the costly and time-consuming probate process.
4. Privacy: Unlike wills, which are public documents filed with the court during probate, the terms and details of a revocable living trust typically remain private.
5. Incapacity Planning: A revocable living trust can provide for the management of your assets in case you become incapacitated. A successor trustee, whom you have appointed, can step in to manage the trust’s assets on your behalf.

Irrevocable Living Trust

1. Asset Protection: One of the primary purposes of an irrevocable trust is to protect assets from creditors, lawsuits, and certain estate taxes. Once you place assets in an irrevocable trust, you typically relinquish control over them, and they are no longer considered part of your estate for tax and legal purposes.
2. Tax Planning: Irrevocable trusts can be used for estate tax planning, particularly if your estate is large and subject to federal estate taxes. In California, there is no state estate tax but estates over $13.61m as of 2024 are subject to federal estate tax. Assets in an irrevocable trust may be excluded from your taxable estate.
3. Medicaid Planning: For long-term care planning, some individuals use irrevocable trusts to qualify for Medicaid benefits while preserving assets for their heirs. Medicaid has strict asset and income limits, and an irrevocable trust can help protect some assets from being counted for Medicaid eligibility purposes.  However, the rules regarding Medicaid and irrevocable trusts are quite stringent, so setting up an irrevocable trust can sometimes preclude eligibility because the asset transfer to the trust may be deemed a gift.
4. Limited Control: Once assets are transferred to an irrevocable trust, you generally have limited control over them. You cannot change the terms or revoke the trust without the consent of the beneficiaries.
5. Complexity: Irrevocable trusts tend to be more complex to set up and administer compared to revocable trusts. 

Summary

In summary, the primary difference between revocable and irrevocable living trusts is the level of control and flexibility you maintain over the assets placed in the trust. Revocable trusts offer flexibility and control during your lifetime but provide less asset protection and tax planning benefits. Irrevocable trusts, on the other hand, offer asset protection and potential tax benefits but require you to relinquish control over the assets. 

The choice between the two depends on your specific estate planning goals and circumstances. Some individuals use a combination of both types of trusts in their estate plans to achieve various objectives. Consulting with an experienced Folsom estate planning lawyer can help you determine which type of trust, or combination of trusts, is most appropriate for your situation.