Irrevocable Trust

What Is a Trust?

A trust is a legal entity within which a trustor can place their assets (in whole or part) to be utilized by themselves or their heirs in the future. Similar to a last will and testament, trusts have specific rules concerning the nature of the assets it contains. These rules detail which specific assets get transferred, when they are transferred, and even how the assets can ultimately be used by the inheritors.

What Is an Irrevocable Trust?

A revocable trust is a kind of living trust. It is made during the lifetime of the trustor. It has the unique ability to be altered, discontinued, or changed in any other way by the trustors themselves during their lifetime.

In many cases, trusts are arranged for the purpose of transferring assets outside of probate.

On the other side of the spectrum are irrevocable trusts. These types of trust cannot be revoked or altered in any way. There are exceptions to this rule, but they are very uncommon.

How Does an Irrevocable Trust Work?

If a trustor decides to move some or all of their assets into an irrevocable trust, they give up complete control of those assets. The irrevocable trust acts as the lawful asset owner, and the assets get registered or retitled into the name of the trust itself.

Not to put too fine a point on it, but in the use of trusts, it bears repeating: the assets do not belong to the original owner anymore. As such, those assets do not bear on their wealth, their estate value, or their tax liabilities.

What Are the Advantages of an Irrevocable Trust?

There are many benefits of an irrevocable trust, ranging from irrevocable trust taxes to income assistance eligibility. The primary benefits of an irrevocable trust include (but are not limited to) the following:

  • Irrevocable trust taxes can minimize estate tax burdens.
  • Can help maintain eligibility for government assistance programs.
  • Provide protection for an individual’s assets.
  • Increase a person or couple’s income and asset privacy.

What Are the Disadvantages of an Irrevocable Trust?

In the same way that many benefits of an irrevocable trust exist, there are also a number of disadvantages to irrevocable trusts. These include (but are not limited to) the following:

  • In all cases, entities lose complete control of their assets.
  • While not impossible to change, irrevocable trusts are very difficult to alter after their creation.

The Parties of a Trust

The main parties involved are the Trustee, the Beneficiaries, and the Grantor.

The trustee is defined as the individual responsible for managing the trust itself. They can be a beneficiary or heirs, but they cannot be the grantor of the trust.

Beneficiaries are those individuals that receive the assets. They can be members of the family, family friends, or even entities (such as a business or non-profit organization). However, like the trustee, they cannot be the grantor.

A grantor (also called a “trustmaker”) has the unique ability to alter the trust’s terms. This may include the naming of beneficiaries, the list of assets, as well as the ways in which the assets themselves can get distributed.

Irrevocable Trust Types

The first type of irrevocable trust is an Irrevocable Life Insurance Trust. An irrevocable life insurance trust (or ILIT) is a specific type of trust that can’t be changed or revoked after it’s set up.

Further, irrevocable life insurance trusts are arranged with one primary asset being owned by the trust: a life insurance policy. After a grantor contributes the death benefits to the trust, they cannot alter the trust’s terms or repossess any of the trust’s assets.

Special Needs Trusts

Another type of trust is the special needs trust. This particular arrangement is a legal and fiduciary relationship that gives someone with mental disabilities, physical disabilities, or a chronic illness, the ability to receive payments without affecting the individual’s public assistance eligibility for disability benefits.

Examples of these benefits include the following governmental agencies and organizations: Supplemental Security Income, Social Security, Medicaid, and Medicare.

A common use of special needs trusts comes by way of enabling an ill or disabled person to receive additional income, while at the same time protecting them from benefit eligibility for government programs that specifically require a certain maximum income level threshold.

Lifetime Gifting Trusts

Lifetime gifting trusts are an alternative to bequeathing assets to heirs after an individual’s death. In the case of lifetime gifting, an asset holder “gifts” a certain amount of money or other assets to their heirs during their lifetime.

One example of this is the Crummy Trust. This type of trust is often utilized by parents to gift their children money or assets, while, at the same time, protecting their money from onerous federal gift taxes.

In the tax year for 2020, the limit for Crummy Trusts is set at $15,000, meaning all gifting trusts in this category would need to fall at or below that number.

Charitable Trusts

A charitable trust is a version of irrevocable trust. As the name implies, these trusts are arranged and set up for charitable purposes and, depending on local laws, may have different legal import than the phrase charitable organization. Further, charitable trusts typically receive a number of tax benefits as well.

Self-Settled Trusts

Self-settled trusts are a type of trust where the settlor doubles as the individual who acquires the trust’s benefits. In these trusts, the settlor and the beneficiary are the same entity.

Asset Protection Trusts

For those in need of a financial-planning arrangement, one particularly strong vehicle is the Asset Protection Trust (or APT). This is a robust trust in which an entity’s assets are held to protect them from creditors, lawsuits, and legal judgments ruled against their estate.

What Are Irrevocable Trust Taxes?

One of the most important considerations with regard to any type of trust is the tax burden or benefit associated with it. For Irrevocable Trust taxes, individual’s need to be (at minimum) aware of the following: estate taxes, capital gains tax, and tax deductions.

Frequently Asked Questions (FAQ)

Should you get an irrevocable trust? Irrevocable trusts are ideal for individuals who have clear financial goals for gifting, bequeathing, or protecting their assets, or the assets of others via these means.

Who are irrevocable trusts best for? Irrevocable trusts are ideally suited for individuals or couples that have assets to gift, which would otherwise receive onerous tax burdens.

Who does not need an irrevocable trust? People that are not considered “wealthy” do not have a great reason to engage in an irrevocable trust. Likewise, individuals that will not need to take advantage of Medicaid benefits also will not need an irrevocable trust. Finally, remember that you lose control of all the assets in the trust and cannot change the beneficiaries, so if you feel this would be a burden, then you also should not arrange an irrevocable trust.

Can you sell a house that is in an irrevocable trust? In a way, yes. The beneficiaries of the trust can sell the house that is held in an irrevocable trust. Since you do not own the assets anymore (including any home within the trust), you will need to have the beneficiaries sell the home for you. Keep in mind that the trust will also be responsible for any taxes incurred from the house’s selling.

Are irrevocable trusts a good idea? Irrevocable trusts are a very good idea if you are wealthy and need to reduce your tax burden, have a dependent that is ill or disabled, or if you are at risk of lawsuit and want to shield your assets from rulings against you and/or your estate.