The three parties involved in every trust are as follows:
- The Grantor;
- The Trustee; and
- The Beneficiary
The Grantor creates the trust and funds it with his or her assets. The Trustee receives the assets and manages them according to the terms of the trust agreement. And, the Beneficiary enjoys beneficial use and income from the trust assets.
Trusts are generally broken down into two categories:
- Revocable Trusts; and
- Irrevocable Trusts
The primary difference between a revocable and irrevocable trust is that a revocable trust can be amended or revoked at any time. For example, if you create a revocable trust and then want to change the terms of the trust, you can do this whenever you like. Also, you can revoke the trust and create an entirely new trust if that suits you better.
Neither of these things can be done with an irrevocable trust. An irrevocable trust cannot be amended or revoked by the Grantor once it has been created. As a result, the terms of the trust are essentially permanent.
When creating an irrevocable trust, the Grantor transfers all ownership of their assets to the irrevocable trust. This legally removes all of the Grantor's rights of ownership of the assets and transfers them to the irrevocable trust. As a result, the assets no longer belong to the Grantor and have no bearing on his or her wealth, the value of their estate, or their tax liability.
Some of the most popular irrevocable trusts are as follows:
- Special Needs Trusts - used to provide income to disabled beneficiaries, without jeopardizing their eligibility for public benefits, such as Social Security Income, Medicare, and Medicaid
- Irrevocable Life Insurance Trusts - used to hold term or permanent life insurance policies during the insured’s lifetime, then manage the distribution of the life insurance proceeds after the insured's death
- AB Trusts - used by married couples to minimize estate taxes by maximizing the unlimited marital deduction
- Asset Protection Trusts - used to hold an individual's assets in order to protect them from lawsuits and creditor claims
- Charitable Remainder Trusts - used by individuals to enjoy an income stream, reduce their taxable income, and then donate the remaining interest in the trust to charity
The biggest advantages of an irrevocable trust relate to creditors and estate taxes. Because assets you put into an irrevocable trust are no longer legally owned by you, the trust protects those assets from lawsuits and creditor claims. In Addition, the assets in an irrevocable trust are not considered for Medicaid eligibility and, in most cases, are not subject to state and federal estate taxes when you die.
Firstly, an irrevocable trust cannot be modified without permission of the trust Beneficiaries and/or court intervention. Secondly, because you relinquish all of your rights of ownership of the assets you transfer into an irrevocable trust, you no longer have any control over them.
This Inflexibility and loss of control are the primary disadvantages of an irrevocable trust that you should take into consideration when comparing it to a revocable trust. They are also why an irrevocable trust is used less frequently than a revocable trust for estate planning purposes.
Whether you need an irrevocable trust in your estate plan will depend on your specific estate planning goals. If you are interested in achieving any one of the following estate planning goals, an irrevocable trust may be a good choice:
If you are worried about being sued because of your profession, an irrevocable trust might be right for you. Some professions like doctors, real estate investors, and business owners are more prone to having lawsuits filed against them. If you want to protect yourself, both professionally and personally, an irrevocable trust is a good option.
If you are worried about being able to afford the cost of long-term care and want to be able to qualify for Medicaid long-term care benefits when the need comes, you should establish an irrevocable trust to protect your assets and to avoid having to spend down all of your wealth before Medicaid will step in to help.
Minimizing Estate Taxes
If you are worried about estate taxes, you may want to consider an irrevocable trust. The current estate tax exemption is more than $11 million per person. If the value of your estate exceeds this threshold, establishing an irrevocable trust to hold your assets will help reduce your estate tax liability.
On the other hand, both revocable and irrevocable trusts will enable the trust assets to bypass probate. But a revocable trust allows you much more flexibility and control over the assets you put into the trust.
So, if probate avoidance is your top priority, then a revocable, rather than an irrevocable trust, may be the right choice since it avoids probate just like an irrevocable trust but provides much more flexibility and control.
Also, if having the option to change Trustees and Beneficiaries is important to you, then a revocable trust, rather than an irrevocable trust, may be better for you. With an irrevocable trust, making these changes will be much more difficult to do.
Estate planning can be complex, and it's usually best to consult with an experienced estate planning attorney when deciding if an irrevocable trust is right for you. Contact a qualified estate planning attorney today for a free consultation.