A trust can be created for any legal purpose, so there are many types. What type of trust is right for you? In the context of estate planning trusts can be divided into two types: inter vivos and testamentary trusts. Inter vivos trusts are sometimes called living trusts because they are created during your lifetime. Testamentary trusts are contained in your Will and are not created until your death. Testamentary trusts do not avoid probate.
An inter vivos trust, or living trust, can be either revocable or irrevocable. If you retain the ability to revoke the trust without the consent of the beneficiary, it is revocable. The distinction is important because you are treated as owner of the property held in a revocable trust. Therefore, a revocable trust does not shield the property from the claims of your creditors and any income from trust property is treated as your income. The main advantage of a revocable trust is that you retain absolute control. In an irrevocable trust you relinquish ownership in the property to a third person: the Trustee. The trustee administers the property pursuant to your written instructions. Generally, property held in an irrevocable trust is not subject to claims of your creditors and the income is income of the trust: it is not imputed to you. Irrevocable trusts will have a Federal Tax ID number.
Both types of trusts – revocable and irrevocable – have the advantage that property held in them avoids probate. Which is right for you depends on your circumstances and intent. If you have read this far, I suspect you have already decided that the revocable trust is a better choice for you. If so, and unless you have great wealth or income or both, or are infirm or elderly, you are probably right. California has no inheritance tax and the federal estate tax exemption for 2016 is a hefty $5.45M per person. Today, most individuals and couples, therefore, can fully accomplish their present estate planning objectives through a revocable living trust.
However, as in most things in life, one-size does not fit all and nothing remains the same. The law and your circumstances change. For example, the generous estate tax exemption is regularly scheduled to sunset so the present sizeable exemption is not guaranteed in future years. The main caveat to take from this fact is that estate planning is an ongoing process. What is right for you today might need tweaking tomorrow. Therefore, any estate plan should be reviewed at least annually and whenever there is a birth, marriage, divorce, death, change in the law, or other circumstance which might make the provisions in your trust or Will outdated.
As we age or become infirm and increasingly need to rely on others, we are more willing to relinquish control, especially when it may be necessary to qualify for long-term care assistance through Medi-Cal — and still retain a legacy to pass on to our loved ones. This is when an irrevocable trust, carefully drafted at the right time, might be just what the doctor ordered.