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What are Irrevocable Trusts?

When lawyers talk about trusts and estate planning, they generally mean revocable living trusts. These are flexible estate planning tools whereby a person (known as a settlor) transfers assets to a trustee. In living trusts, the settlor and trustee can be the same person. Basically, if you create a living trust and name yourself trustee, you continue to manage your assets during your lifetime, but upon your death those assets do not pass as part of your probate estate. These trusts are “revocable” because you retain the right to amend or revoke them at will during your lifetime.

There are also irrevocable trusts in estate planning. As the name implies, these trusts cannot be amended or revoked by the settlor once made. So why would anyone choose to make a trust irrevocable? The two main reasons are taxes and creditors. A revocable trust may keep assets out of your probate estate, but they remain subject to taxation and creditor claims. For example, if you place your assets in a living trust, someone who sues and obtains a monetary judgment against you individually can still enforce it against the trust assets. The trust is not a liability shield.

Similarly, any assets in a revocable trust remain part of your taxable estate. For most people this is not a big deal, as only wealthy estates are subject to federal estate tax (and California no longer imposes its own inheritance tax). Still, there are cases where an irrevocable trust can help minimize your tax burden and maximize the benefits to your designated heirs.

A Cautionary Example

One thing to keep in mind, however, is assets placed into an irrevocable trust are no longer your personal property. Even if you name yourself trustee, your obligation is to the named beneficiaries of the trust. This means you cannot squander trust assets without consequence.

Consider a high-profile case involving the children of the famous B-movie producer Roger Corman. Corman and his wife earned millions in profits from their films, most of which they placed into a series of irrevocable trusts to benefit their four adult children. The Cormans serve as trustees, and the children are scheduled to receive distributions at specified intervals following both of their parents’ deaths.

Six years ago, two of the Corman children sued their parents, accusing them of improperly borrowing millions of dollars from the trusts and using the funds “for their own personal benefit.” The children demanded a full trust accounting and a court order removing their parents as trustees. In 2012, a probate judge rejected the children’s lawsuit but the litigation continued for several more years. Recently, a California appeals court upheld an order authorizing the Corman parents to pay for the expense of their litigation from the various trusts’ assets.

Of course, the time and expense of litigation only depletes the assets available for the children in the first place. This is something to consider before using an irrevocable trust as an estate planning device. After all, your objective should be to minimize intra-family strife and the potential for costly litigation. That is why, before making any decision regarding the use of a trust, you should speak with a qualified San Diego estate planning attorney. Contact the Law Office of Scott C. Soady if you would like to speak with someone today.

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