An irrevocable trust, like any trust, is a vehicle whereby property is set aside by a grantor and held by a trustee for the benefit of a beneficiary. Irrevocable trusts, as the name suggests, are distinguished by the fact that the grantor gives up ownership rights to the property and the trust usually cannot be changed.
Below we have detailed some of the key advantages and disadvantages of creating an irrevocable trust. Please keep in mind this blog does not constitute legal advice for your specific situation. If you are considering creating an irrevocable trust, always have a trained estate planning attorney review your unique circumstances and advise you on the best course of action.
Creating an irrevocable trust in which to hold certain assets is a fantastic way to protect them from the potential seizure of those assets as a result of legal challenges. For example, assets held in trust are generally protected from creditors seeking to collect unpaid debts. They are also usually protected from court judgments against you such as a personal injury lawsuit. So, say you were in a car accident and you were sued by the other driver. If you had assets held in an irrevocable trust, those would likely not be included in the settlement and would be safe for whatever purpose you intended for them.
2) Assets not countable
Eligibility for numerous government benefits like Medicaid and Supplemental Security Income (SSI) is dependant on one’s assets and income. If your aging parent is in need of financial assistance in order to afford the Long-Term Care they need, but he or she has too many assets to qualify, they may have to use up all of their wealth and assets in order to pay those costs themselves, leaving nothing to pass on to their loved ones. Similarly, if you have a special needs child and you leave them assets directly in your will, their inheritance could disqualify them for SSI benefits. Placing assets in an irrevocable trust, however, usually will make those assets non-countable when it comes to those vital government benefits.
3) Estate taxes
Assets held in an irrevocable trust are usually not counted towards your estate or subject to the estate tax. So, if you are someone with a large enough estate that you may have to pay massive estate taxes, placing some assets in an irrevocable trust may allow you to pass them on to your loved ones without their being subject to taxation, or even decrease your estate to a point where you do not have to pay estate taxes at all.
In order to obtain the advantages listed above, you are forced to give up all control over the assets you are placing in the trust. It is irrevocable, meaning you cannot change your mind or update the trust without a court order and some very specific circumstances. Technically, you no longer own the assets. They are owned by the trustee or the trust itself.
2) Income taxed, usually at a higher rate than individuals
Any income generated by an irrevocable trust, such as dividends paid from securities, will be subject to income taxes which the trustee must payout of the trust funds. Unfortunately, taxes on irrevocable trust income is also usually taxed at a higher rate than individual income tax rates.
3) May be subject to gift tax
Placing assets in an irrevocable trust may be legally considered a gift, and in 2016 the gift tax exemption is $14,000 per individual. So, any assets transferred to an irrevocable trust over $14,000 will be subject to the US gift tax.
A skilled estate planning attorney can help you weigh the benefits and drawbacks of creating an irrevocable trust based on your unique circumstances and goals. Additionally, these planning vehicles can be incredibly complex, so it is not a process that you want to tackle on your own without professional guidance. Contact the Matus Law Group today and let us help!