Irrevocable trusts are beneficial legal tools for preserving and distributing an estate. They can help reduce tax liability, make access to government benefits possible, provide financial support for a child or special needs heir, protect assets, and more. However, an irrevocable trust can also be an irreversible option with complex tax implications that requires thorough consideration before execution.
Since the rules of irrevocable trusts are complex and vary by state, setting up a trust should be left to a knowledgeable attorney. However, those considering an irrevocable trust should understand how they work, the benefits they can provide, and the disadvantages. Here are the basics those considering an irrevocable trust should know.
What Is an Irrevocable Trust and How Does One Work?
An irrevocable trust is a legal vehicle in which assets are held and directed for a beneficiary by a trustee, with the transfer of asset ownership from the creator to the trust typically being final and irreversible. Unlike a revocable trust, the trust creator (also referred to as the grantor) cannot make changes to the trust or terminate it without permission from the trust beneficiary.
Once assets are transferred into an irrevocable trust, the grantor no longer has legal ownership of the assets in the trust nor is responsible for related taxes. Trust assets can include cash, investments, a business, a life insurance policy, and more.
An irrevocable trust can be established while the grantor is alive (i.e., a living trust) or at the time of the grantor’s death per the terms of a will (i.e., a testamentary trust).
Reasons To Consider an Irrevocable Trust
Assets placed in a trust are held for the benefit of the trust beneficiaries per the terms of the trust agreement, allowing heirs to avoid the probate process. Trust assets are usually not subject to estate taxes and, in most cases, not subject to inheritance taxes either.
Minimizing estate tax liability for the grantor and the beneficiaries is one of the primary reasons irrevocable trusts are established. However, many irrevocable trusts meet other needs as well. Here are a few examples:
- To leave money to children or grandchildren to be distributed once a certain age or life milestone is reached
- To avoid estate taxes on life insurance proceeds
- To provide financial assistance to a special needs heir without interfering with their ability to qualify for government assistance
- To make Medicaid qualification possible if needed for long-term care or to put money aside specifically for long-term care
- To protect a professional’s assets, such as a doctor or accountant, from a lawsuit
The Complexities of an Irrevocable Trust
Because an irrevocable trust is a complex legal vehicle with both income tax and estate tax implications, look for the assistance of a knowledgeable attorney who can ensure the trust follows ever-changing state rules while meeting the grantor’s goals.
Lawrence Israeloff, an experienced attorney and certified public accountant, consults on trusts and estate planning. Call the Law Offices of Lawrence Israeloff today to discuss the pros and cons of an irrevocable trust pertaining to the specifics of your estate or if you need other estate planning assistance or advice.