California allows you to create irrevocable trusts in your estate plan. An irrevocable trust is mostly set in stone, so you should be fairly certain before setting it up because you won’t be able to revoke or modify it. The benefits of an irrevocable trust are protection from creditors, reduced taxes, and eligibility for government benefits.
Protection from creditors
One of the top reasons why people consider irrevocable trusts in their estate planning is for protection from creditors. You don’t get this same level of safeguarding with a revocable trust. The law considers assets in an irrevocable trust to no longer belong to you. Because the assets aren’t yours, creditors can’t request debt repayment from them.
The IRS treats income from an irrevocable trust as trust income rather than personal income. This would help prevent your beneficiary from having to pay more income taxes if their trust income puts them into a new tax bracket. Your estate taxes may also be lower because the assets from an irrevocable trust are separate from the estate. When someone anticipates that their estate’s value will exceed the exemption, they might deposit their life insurance policy into an irrevocable trust. Life insurance tends to have a high value, so this asset might make your estate go over the estate tax exemption.
Passing on assets through an irrevocable trust could protect your beneficiary’s ability to receive Medicaid and certain other government benefits. If one of your beneficiaries has special needs, you could set up a special needs trust for them. This type of trust protects their eligibility for government benefits. If you gave them a standard inheritance, they would probably lose their assistance until using up the inheritance.
Irrevocable trusts are worth considering in your estate plan because they are safe from creditors and help reduce your estate taxes. The downside is you no longer have control over the assets once they are in the trust.