What is a trust?

Irrevocable Versus Revocable Trusts

It is important to make note of the fact that an “irrevocable trust” is inherited as a document left by a “grantor” once that person is  deceased, and cannot be altered; plus it may not be considered part of a taxable estate, therefore fewer taxes may be due on your passing. 

Whereas a “revocable trust”, also known as a “living trust”, can be a much more flexible inheritance instrument — and most importantly, the grantor who wrote the trust document can maintain control while still alive.  It is also worth mentioning, due to the problems many beneficiaries have with trustee, that it is critical to choose a trustee who will know his or her place, and not adopt an attitude that the money and assets belong to the trustee.

Another use for irrevocable trusts – in terms of beneficiaries getting trust loans that work hand-in-hand with Proposition 19, is a parent to child property tax transfer managed by a trust lender –  making sure that  the trust lender stays on top of the process, and  ensures that keeping a parent’s low property tax base  becomes a reality.

Moreover, the trust lender can help you, as a  beneficiary inheriting a parental home, buyout a sibling or several co-beneficiaries looking to sell their inherited property shares – with a sibling-to-sibling property transfer; at a much higher price range than any outside buyer would offer – due to the avoidance of a realtor, who would typically charge a 6% commission – plus other pricey  closing costs such as legal fees, paperwork processing fees; transfer taxes, escrow expenses, notary fees; as well as fees for credit checking, value appraisal, title search, home inspection, etc.

When it comes to selling a home, there is, as they say, “no free lunch”. Meanwhile, beneficiaries keeping a family home at their parents’ low property tax base, through an irrevocable trust loan in conjunction with Proposition 19 (formerly Proposition 58), is able to keep that inherited home in the family basically forever at the parents’ low  property tax base, thanks to tax relief still protected by Proposition 13. 

To be clear, an irrevocable trust typically transfers assets out of an estate and potentially out of the grasp of estate taxes and probate, but it can’t be altered by the grantor after it has been executed. So once you establish this sort of trust you lose control over the assets and cannot change any of the terms, or dissolve the trust. However, if you’re gaining the financial advantage of a parents’ low property tax base going forward – it’s generally worth the trade off.

A “revocable trust” can help assets pass outside of an estate in probate, and allows you to keep control of the assets, as long as you are alive. A revocable trust is flexible, and can be dissolved whenever you wish. A revocable trust generally becomes irrevocable when the grantor or trustor (i.e., the person who placed the assets into trust for his or her beneficiaries) passes away.

Trust Assets and Inheritance Distribution

An irrevocable trust is generally preferred over a revocable trust if your objective is to reduce the amount of estate taxes by removing inheritance trust assets from your estate. When the assets are transferred into a trust, you are of the tax liability on the income generated by the trust assets are relieved.  Even though inheritance distributions will most likely result in income taxes. However, this type of trust will also provide protection against a legal judgment, should that occur.

Assets in a trust may also be able to distribute to heirs outside of probate, saving time, court fees, and potentially reducing estate taxes as well. Other benefits of a trust include managing your money. You can set the terms of the trust to control when and who assets will be distributed to.

You can set up a revocable trust so the trust assets stay accessible during your life while deciding who remaining assets will pass to, regardless of family complications. Parents often set the terms of trust distribution to protect the money in a trust by holding off on final distribution until the beneficiary is sufficiently mature to handle inherited money wisely, such as distribution at age 30, and again at 40, or whatever.

Final Trust Distribution

Some trusts do not reach final distribution until a beneficiary, who may be considered to be a spendthrift, reaches his or her 60th birthday — imagine waiting that long! This type of trust can also protect an estate from creditors coming after heirs who unwisely get deep into debt. Most importantly for some, a trust can allow assets to transfer to beneficiaries outside of probate and thus remain private, along with lessening money spent on probate court fees and taxes.

However, attorneys bent on convincing a family to leave inheritance assets in trust and ignore probate when they pass on may fail to mention fees associated with a trustee, who typically remains with a trust for the life of that trust, as well as subsequent attorney fees, bank fees, and other nominal costs that add up.