What's the difference between Revocable & Irrevocable Trusts?
California laws allow you to create trusts that will spare your heirs from the horrific, expensive and time consuming probate process. There are two categories of trusts: revocable trusts and irrevocable trusts. It is crucial to understand the advantages and disadvantages of each because neither one is a "one size fits all" solution. Everybody’s life is unique and people have different objectives, needs and family dynamics. These factors will shape which type of you trust you should have . Both types of trusts allow you to transfer assets (your house) to a trustee who will administer and ultimately distribute the assets (your house) to the beneficiaries (usually your son and/or daughter) as provided in your trust. But the main difference between the two types of trusts is that the revocable trust can be changed at any time by the maker of the trust prior to the maker’s death; whereas an irrevocable trust cannot be changed without the consent of all the trust’s beneficiaries. The trust beneficiaries are the ones who are getting the assets in the trust.
Revocable Living Trusts:
When you hear that someone has a living trust, the odds are that it is a revocable living trust. Since the early 1980’s revocable living trusts have become increasingly popular for Californians to escape probate. Revocable living trusts have become the main documents used by California homeowners to avoid their homes going through probate upon their death. Normally, mom and dad (who created the living trust), are the trustees of their revocable living trusts. As the trustee of a living trust, you have complete control over your house, meaning you can sell the house, refinance the house, change your mind in terms of who gets the house when you die. In the revocable living trust you decide who gets your house when you die and you avoid the lengthy and expensive probate process, which will minimize the risk of dispute between your heirs as to the distribution of your assets while maintaining confidentiality of the distribution of your estate. Revocable trusts are very instrumental after you die but will have the necessary planning to take care of you in the event you are temporarily incapacitated. In a nutshell, a revocable trust is more flexible because your assets (the house) still belong to you and allow you to have access to the assets that were placed in your revocable living trust. However, a revocable living trust does not protect you from your creditors nor from Medi-cal. Most revocable living trusts will become irrevocable on the trust maker’s death.
An irrevocable trust is a trust that cannot be revoked, the terms of the trust cannot be modified, and it cannot be terminated at your wish. This is really "what’s done is done". However, in California if all the beneficiaries of the trust and the trustee agree, then the irrevocable trust can be revoked. Not being able to revoke the trust is one of the key distinctions between an irrevocable trust and a revocable trust. Generally, irrevocable trusts are used to avoid estate taxes, used as an asset protection vehicle, and in Medi-cal planning. You can transfer a piece of property to an irrevocable trust and let’s say that property is worth $1 million at the time of transfer and 30 years later that property is worth $5 million dollars. The $4 millions of appreciation in value will not be counted in calculating your estate taxes, thus, this is one way the super rich minimize their estate taxes. An irrevocable trust can be used as an asset protection vehicle. You can transfer real estate into an irrevocable trust, but the moment you transfer it, you have changed its ownership. You have given it away to the irrevocable trust, you cannot get revoke the gift. By the same token, all of your future creditors cannot go after that real estate either. This same concept also applies in Medi-cal planning, where you transfer your house into an irrevocable trust for your children, and because it is out of your name when you die, the State of California cannot come after your house.
In conclusion, all trusts involve transferring assets to the trustee to hold for the benefit of another and an irrevocable trust is one where you cannot change your mind after the fact.