By Rachel Puryear, Semi-Retired Attorney, Legal Geek, Realtor with Berkshire Hathaway (DRE 02099554)

Since the passage of Prop 19 in California, I have had several inquiries about what the new law means for families interested in estate planning. I have also noticed a trend of people asking if they should get an irrevocable trust, in order to avoid property tax increases for their heirs after they pass away.

For estate planning purposes, there are revocable trusts, and irrevocable trusts.

Revocable trusts are by far the most common family trusts used in estate planning. Revocable trusts are normally controlled by the person who created the trust (this person is known as the “trustor”) during the trustor’s lifetime. As their name suggests, revocable trusts can be changed or revoked by the trustor, at any time. Revocable trusts are for the benefit of the trustor, and also the trustor’s heirs. Revocable trusts are good for avoiding probate proceedings after death, and they usually offer a family greater level of privacy and autonomy over estate administration than probate court proceedings would. Probate court proceedings oversee the administration of estates of recently deceased people.

An irrevocable trust, however, as the name suggests, may not be revoked or modified. With an irrevocable trust, typically the trustor loses control over the assets they place into the trust, and someone else manages the trust assets (the person managing either type of trust is the “trustee”). Irrevocable trusts, because of their complexity, are generally more expensive than revocable trusts – both to set up, and also to maintain. With a separate trustee needed to manage an irrevocable trust, trustee fees are also commonly charged. Approach an irrevocable trust with great caution – this is not something you want to have buyer’s remorse over.

An irrevocable trust is a pretty drastic solution, and should be considered only where the benefits clearly outweigh the major ramifications of creating one. For some people, and under certain circumstances, creating an irrevocable trust does make sense – for instance, irrevocable trusts are often found among people who are extremely wealthy (think at least $11M+ estates) for tax avoidance, or for people at risk of lawsuits who want to shield themselves from creditors, or people with medical considerations who have permanent incapacity, or other other special needs.

For purposes of Prop 19, specifically, an irrevocable trust could be worth it for a family who – for example – owns commercial real estate, or a large amount of residential property. Particularly so if this is a multigenerational family business in renting property. In such an instance, the heirs are very likely to unanimously want to hold onto the property after they inherit it, but they will probably not live in it. For such a family, an irrevocable trust could save them a lot of property taxes, as they continue the family business of renting commercial and large amounts of residential properties.

However, I find that for most families seeking estate planning, the above situation is relatively rare. Much more commonly, a family considering making a trust has their home that they live in, plus maybe another small residential (single family or up to 4 units) building or two that they rent out. If they do have rental property, they are probably using it to supplement their income, rather than as their family’s primary business or source of income. When their heirs inherit the properties, they will likely sell them – especially if there is more than one heir, as selling will likely be necessary in order to divide an estate where the assets consist mainly of one or a couple properties or so. Furthermore, being a small landlord in California can be a difficult and (increasingly) risky proposition, which is not always as profitable as many believe. The heirs are likely to prefer to simply have the proceeds anyway.

Therefore, for a more typical family contemplating estate planning and considering making a trust, a revocable trust is probably the way to go. Especially where their heirs are more likely to sell or live in inherited properties, than to keep them as rental property for many generations. Not only is a revocable trust more cost-effective for more typical families, it’s usually just a better fit.

As always, of course, your situation is unique, and this post only provides general information, as well as my opinion. Reasonable professionals can have different opinions. Laws are complex, and what works for one person may not work another. While I hope this gives you some guidance, please remember that only an attorney who knows your situation and has had a chance to ask you thoroughly about your goals, can give you legal advice and recommendations specific to your situation. Therefore, please do not rely on this post as legal advice. If you need legal advice, you are encouraged to consult with a knowledgeable professional of your choice.

As always, thank you for reading Free Range Law!

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