An irrevocable trusts is an advanced estate planning tool. As such, you should seek the advice of a competent and experienced attorney to help you consider the consequences and benefits of using this particular tool.
What is an Irrevocable Trust?
An irrevocable trust is a specific kind of trust that is usually designed for the purpose of protecting assets and avoiding tax consequences. There are many different kinds of irrevocable trusts, including Irrevocable Life Insurance Trusts (ILIT), Medicaid Asset Protection Trusts (MAPT), Asset Protection Trusts, and Special Needs Trusts. Unlike revocable trusts that can be modified, controlled, and terminated by the person that created the trust, an irrevocable trust cannot. This kind of trust is almost always permanent in nature and doesn’t allow for the same kind of flexibility. However, unlike revocable trusts, irrevocable trusts can save estate and income taxes, and can offer substantial protection to assets.
Benefits of an Irrevocable Trust
There are several reasons why a person, particularly a parent, might create an irrevocable trust. These reasons include:
- You can control the timing of your children’s inheritance. This can ensure your children don’t get a sudden influx of cash they are not prepared for, or mature enough to handle. For example, you can provide that your children receive a certain amount of income every few months, or that they receive their entire inheritance at the age of 30 years old.
- You can control the circumstances under which your children receive their money. For example, trust funds may be used for their education, health care, housing, and basic needs.
- Your assets can be protected from your creditors. Once you transfer your assets into an irrevocable trust, you no longer own them. Therefore, those assets can no longer be accessed or taken by creditors.
- Your assets can be protected from your children’s creditors. After you die, if you leave all of your property to your children, that property may be taken from your children’s creditors. An irrevocable trust can prevent this from happening.
- If all of your property is left to your children after you die, rather than left in trust, it can be included in your child’s estate for federal estate tax purposes.
Disadvantages of an Irrevocable Trust
Remember, irrevocable trusts are usually created with a very specific purpose in mind. If you don’t have a specific reason or need for an irrevocable trust, a revocable trust may be a simpler and adequate tool to meet your needs. Some of the drawbacks of this type of estate planning tool include:
- You lose control of whatever property you put into the trust. Once transferred into the trust, the property can only be used as detailed in the trust document.
- It is typically more expensive than other estate planning tools.
- You must transfer all of your assets into the trust.
- There are tax requirements for your irrevocable trust, which may require you to hire an accountant or other tax professional to assist you in complying with state and federal laws.
- Irrevocable trusts are complex documents that require significant planning.
If you’d like to learn more about your estate planning options, or to know if an irrevocable trust is right for you, please call our office and schedule a consultation with one of our experienced attorneys.