Revocable vs. Irrevocable Trusts
Deciding between a revocable or irrevocable living trust can be difficult. Revocable trusts are more flexible and allow the settlor — the person who creates a trust — continued access to the trust property.
However, irrevocable trusts have tax and protective benefits that revocable trusts do not have. At Fox, Shjeflo & Babu LLP, our San Mateo County trust lawyers can analyze your situation and your goals to determine what type of living trust best serves your needs.
Benefits of a revocable trust
A revocable trust works much like any other classification of trust. With the help of a San Mateo County living trust attorney, a settlor creates a trust that designates a trustee and beneficiaries. The trustee then manages the funds for the benefit of the beneficiaries in accordance with guidelines established in the trust document. The advantage is that the settlor can modify or revoke a revocable trust at any time, allowing him or her to take back the property in the trust should he or she decide to do so.
There are, however, some disadvantages:
- Revocable trusts do not have the tax benefits of many irrevocable trusts;
- The settlor usually pays personal income tax on any trust income in much the same way he or she would if the trust did not exist;
- Because the settlor maintains control over the property, a revocable trust cannot protect assets from creditors.
Benefits of an irrevocable trust
The obvious disadvantage of an irrevocable trust is the lack or flexibility. To establish an irrevocable trust, the settlor must completely and permanently surrender control over the trust property. This can be a big decision and you should not make it without first consulting a San Mateo County trust attorney.
Conversely, irrevocable trusts offer the following advantages that revocable trusts do not offer:
- Many irrevocable trusts pay income tax as a separate entity;
- Because the settlor often does not pay personal income tax on this trust income, a settlor can, in some cases, use an irrevocable trust to move to a lower tax bracket;
- Unlike revocable trusts, settlors can use an irrevocable trust to protect assets from creditors. This may not always be the case, however, as such transfers must be done in good faith under the California version of the Uniform Fraudulent Transfers Act (UFTA).
The skilled attorneys at Fox, Shjeflo & Babu LLP can, in many cases, help clients protect assets from future claims.