Implementing an Irrevocable Trust in Your Estate Plan
November 3rd, 2022
When you begin planning your estate, you might be wondering if an irrevocable trust is a good option. While a wide variety of trusts may be utilized to accomplish your estate planning objectives, this type of trust can be beneficial for those seeking to minimize estate taxes, avoid probate, and protect their assets. It’s important to understand the advantages and disadvantages of an irrevocable trust to determine whether it is right for you.
What is an Irrevocable Trust?
An irrevocable trust is a type of estate planning tool that can be used to help you achieve a variety of goals. With these vehicles, the assets are transferred from the control of the grantor into the trust for the benefit of the beneficiaries. Irrevocable trusts cannot be terminated, changed, or modified once they are created.
Irrevocable trusts can come with various benefits. Specifically, they can be used to help ensure you:
- Avoid estate taxes — An irrevocable trust can allow you to remove taxable assets from the estate and avoid or minimize estate taxes.
- Prevent beneficiaries from misusing assets — A grantor can set specific terms and conditions for asset distribution to prevent misuse of assets.
- Retain income from assets gifted to the estate — An irrevocable trust can allow you to make a gift of assets to the estate but retain income generated from them.
- Protect assets from lawsuits and creditors — When you transfer assets into an irrevocable trust, they are protected from civil judgments and claims by creditors.
- Retain eligibility for government benefits — By placing your assets in an irrevocable trust, you may not need to deplete your savings before you qualify for certain government benefits such as Medicaid.
There can also be a few drawbacks when it comes to creating this type of trust. A major disadvantage is that you cannot change an irrevocable trust once it has been finalized. There may also be current or future tax consequences that require careful planning. It’s crucial to discuss the pros and cons of creating an irrevocable trust with a knowledgeable estate planning attorney.
What’s the Difference Between a Revocable and an Irrevocable Trust?
If you’re starting the estate planning process, it’s crucial to know the difference between an irrevocable trust and a revocable trust. Although an irrevocable trust has many advantages for those who seek to preserve their assets for future generations, it might not be the right vehicle for every situation. A revocable trust may be a good option for those who want to remain in control of their estates and have the ability to change the trust terms.
Other differences between the two types of trusts include the flexibility and accessibility a revocable trust can offer. A revocable trust can be amended at any time — it is often easier to modify than a will. In addition, with a revocable trust, a grantor can name themselves as trustee so that the property and assets remain readily available to them. Once assets are placed in an irrevocable trust, the grantor relinquishes control over them.
Who Should Use an Irrevocable Trust?
Irrevocable trusts are frequently used by individuals with large estates to minimize the impact of estate taxes. But you don’t need to have a high net worth to create this type of trust. Irrevocable trusts can be used by individuals who simply wish to preserve their wealth for their children and grandchildren. They can also be a good option for married couples when a spouse wants to not only bequeath property to the surviving spouse — but to dictate how the assets should be used.
Since Medicaid has strict asset limitations, an irrevocable trust can be used to help ensure an individual qualifies for these benefits as long as the eligibility criteria and lookback periods are satisfied. However, it’s essential to understand that placing assets into an irrevocable trust can make you ineligible for a period of five years afterward. In other words, an irrevocable trust must be created at least five years before you need to qualify for Medicaid.
Your beneficiaries can benefit greatly from an irrevocable trust. For instance, it can help ensure any heirs with special needs qualify for the costs associated with their daily living. They may still be able to receive a monthly allowable income from the trust while satisfying the eligibility requirements for necessary government benefits.
In some instances, you may not want a beneficiary to receive any assets from the trust until they have reached a certain age, or a certain condition has been met. You can also control the amount of money a beneficiary receives each month or ensure that it is only disbursed for a specified purpose, such as education or housing. This can help to ensure young heirs handle their trust distributions responsibly and prevent careless behavior.
Contact an Experienced North Carolina Trusts and Estates Attorney
Irrevocable trusts can be powerful estate planning tools that can assist you with accomplishing a wide variety of goals. But it’s important to have an experienced trusts and estates attorney to guide you through the process. Carolina Tax, Trusts & Estates is dedicated to providing clients with
Categories: Estate Planning