When it comes to irrevocable trusts, many people seem to know very little about them. Often times, they are viewed as legal creations that exist solely for the benefit of the rich who have assets that they want to ensure get passed on to their heirs when they die. That makes these trusts of little interest to the average person who simply wants an easy way to protect assets and accomplish his or her estate planning objectives. The fact is, however, that these important tools are not just for the wealthiest families in America, and can actually benefit many average American families too.
What is an Irrevocable Trust?
To understand an irrevocable trust, it is first important to know what a trust is and how it works. Trusts are legal relationships involving three parties. These three parties are the Settlor, or Trustor, who creates and funds the trust, the beneficiaries for whom the trust is established, and the Trustee who manages the trust’s assets in accordance with the terms set forth by the Trustor. Trustors fund their trusts by transferring ownership of their property to the trust, to be governed and managed by the trustee.
Many people who opt to use trusts as part of their estate planning strategies choose a type of trust known as a revocable trust. This relationship can be revoked by the trustor if his or her life circumstances change, or for any other reason. Many of those people also name themselves as trustees, to ensure that they maintain control over their assets in the trust while they are still alive. When that happens, they name a successor trustee to take control if they die or become incapacitated.
An irrevocable trust, on the other hand, cannot be revoked unless the other parties to the legal relationship agree. Thus, if you assign your property to an irrevocable trust and the beneficiaries and trustee refuse to allow you to revoke the terms of the trust, there is little that you can do to regain control over those assets. With an irrevocable trust, those assets are simply beyond your control.
How Can an Irrevocable Trust Benefit You?
There are many reasons to use irrevocable trusts, even if you are not super wealthy. Many people need to move their assets beyond their control in order to qualify for certain benefits. For example, if you are applying for Medicaid coverage to pay for your expensive nursing home care, you need to meet certain asset requirements. An irrevocable trust effectively moves your assets out of your control so that Medicaid cannot count them when calculating your eligibility. That can be an effective strategy to ensure that you don’t have to spend down all of your assets just to get the help you need.
Like any trust, you can also use the irrevocable variety to ensure that you exercise greater control over how heirs receive assets after you die. That allows you to provide regular asset distributions for heirs who have trouble managing money – ensuring that they never receive the type of large sum that might tempt them to waste their entire inheritance in a frivolous way. You can use the same type of measured distribution of assets to provide for minor children, or loved ones with special needs.
There are other advantages as well:
- If your irrevocable trust is set up properly, your transfer of asset ownership does not have to preclude you from still benefiting from income that your trust generates. In that case, even though you would retain no ownership or control over the principal assets in the trust, you could still receive ongoing income payments from the trust.
- You can also appoint a trusted family member to serve as trust protector, and write the trust terms to give that person power to remove and replace a trustee, alter the trust terms, and make other changes that are designed to protect the trust’s assets. You can also include terms to retain a power of appointment, which enables you to alter beneficiaries later.
- Your irrevocable trust can provide tax benefits both during your life and after you die. This can be important, especially if you are concerned about capital gains taxes, and the estate tax.
- If you think that your life insurance proceeds might make your estate subject to the estate tax, you can simply name the trust as your policy beneficiary and ensure that it is not counted as part of your estate when you die.
- Depending on how you structure your trust, you can provide your beneficiaries with some significant capital gains tax benefits – benefits that can make this type of trust a superior option to simply giving assets away.
Choosing an Irrevocable Trust
Obviously, there are some drawbacks to an irrevocable trust as well, most having to do with the loss of asset control that usually typifies these legal relationships. However, when your needs merit it, the irrevocable trust’s advantages can be difficult to replicate with other tools. That makes it an important option for anyone who needs to take advantage of its asset protection, distribution control, and tax benefits.
Like any trust, though, the irrevocable trust is a complex legal instrument that must be prepared properly if it is to accomplish your objectives. And though there are many free trust offerings online, and inexpensive forms that claim that you can create your trust yourself, it is almost always wiser to seek out professional assistance. That way, you ensure that there are no errors in your trust document that might cause it to be ineffective or invalid.
At Biddinger, Bitzer & Estelle, PLLC, our attorneys have the expertise you need to help you create just the right estate planning strategies to protect your assets and secure your future. We’ll assist you in determining whether irrevocable trusts are the right choice for your unique planning needs, and help you create the ideal trust to meet your goals. To discover more about how irrevocable trusts can help you enjoy many of the same benefits experienced by America’s wealthiest families, contact us online or call us today at (989) 872-5601.