California estate planning lawyer explains advantages and drawbacks

If you’re looking forward to a comfortable retirement and to leaving a legacy to your heirs, you need to be aware of potential obstacles to your plan. Lawsuits, business debt, or a prolonged illness can diminish your savings and investments. Fortunately, there are safeguards you can employ, such as an irrevocable trust. At Penrose Chun & Gorman LLP, we understand the challenges of planning for an uncertain future. If you want greater protection for the wealth you’ve worked hard to earn, talk to a Santa Cruz irrevocable trust attorney at our firm.

What is an irrevocable trust?

An irrevocable trust is a legal relationship you create to hold your property for your use during your lifetime and as a legacy to your heirs after you pass. The distinguishing feature of this type of trust is that once you establish it, you generally cannot dissolve it or change its terms, although some changes may be made under certain specific circumstances. For this reason, you should not establish an irrevocable trust without detailed guidance from a knowledgeable trust attorney.

The primary advantages of an irrevocable trust

Here are the most attractive features of an irrevocable trust:

• Protection from lawsuits — A judgment against you in a civil suit can put your personal wealth at risk if the assessed damages exceed your insurance coverage. But the judgment holder cannot attach assets in an irrevocable trust.
• Protection from creditors — If you run up business debt for which you are personally liable as a sole proprietor or a general partner, assets placed in an irrevocable trust are secure.
• Medicaid planning — If you need long-term care due to an illness or disability, you might exhaust your MediCal benefits and have to pay out of pocket unless you have reduced your assets sufficiently to qualify for Medicaid. Assets in an irrevocable trust don’t count as part of your personal property, so you can qualify for benefits without losing those assets.
• Reduce estate taxes — If your estate is large enough to trigger the federal estate tax, you can reduce the estate’s size and avoid the tax by placing your assets in an irrevocable trust. Types of irrevocable trusts used to reduce or eliminate estate tax include life insurance trusts, generation skipping trusts, “intentionally defective” grantor trusts, qualified personal residence trusts, grantor retained annuity trusts, charitable lead trusts, and charitable remainder trusts, to name a few.

Trusts are also used to transfer assets to heirs. But you can also accomplish those legacy goals as well with a revocable trust. A wills attorney would also note that a trust does not fully eliminate the need for a will, which can serve other estate planning purposes. Notably, a will can act as a safety net for distributing any property that you failed to include in the trust.

Disadvantages of irrevocable trusts

The downside of an irrevocable trust is that you no longer control your assets. Changing the trust, though possible, is very complicated and typically requires cooperation from the trustee and the beneficiaries.

Who owns the property in an irrevocable trust?

The trustee is the legal owner of the property placed within it. The trustee exercises authority over that property but has a fiduciary duty to act for the good of the beneficiaries. The trustee manages investments to maximize returns, accounts for the fund and distributes assets according to the trust’s terms.

At what point can assets from an irrevocable trust be distributed?

If the sole purpose of the trust is a bequest, then upon your death, the trustee distributes the trust assets to your beneficiaries without going through probate. Once all disbursements have been made, the trust ceases to exist.

But trusts can be tailored to other goals. You can set conditions for disbursals, such as a beneficiary completing college or getting married. Or you can provide an allowance for a beneficiary, so assets would be distributed on a schedule. Some trusts make disbursals dependent on the performance of investments, only making payments when the fund has turned a profit.

Contact a knowledgeable estate planning attorney for irrevocable trusts in Santa Cruz

Estate planning lawyers at Penrose Chun & Gorman LLP help clients in Santa Cruz and vicinity establish irrevocable trusts. To schedule a consultation, call 831-515-3344 or contact us online.