This article is part of a series exploring the various types of trusts that may benefit you. Today’s topic is irrevocable trusts.
Signing away ownership of assets can feel antithetical to you when you start to think about creating an estate plan that gives you control of what happens to your accumulated assets and meets your goals for financially protecting loved ones.
However, some of you might wish to create an Irrevocable Trust for many purposes, such as reducing taxes, gifting, and asset protection. Assets placed inside cannot be easily removed later because you essentially relinquish ownership of those assets to the trust.
Control Without Ownership
Property owned by an Irrevocable Trust is not subject to estate taxes. Just as creditors and judgment holders can’t reach it because you no longer own it, the Internal Revenue Service cannot tax the assets in the trust. The assets have become the legal property of the trust for the Trustee to hold and manage for the beneficiaries.
As the trust-maker, you determine the exact terms of the trust. For example, you could specify assets are disbursed only when used for a specific purpose, such as paying for college, a new home, or a wedding.
The trust can be written so that heirs receive their entire inheritance at once or in certain amounts over a period of years, such as when they reach a certain age or achieve a milestone (i.e., marriage or graduating college).
Long-Term Care Protections
Assets placed in Revocable Living Trusts are generally exposed to a nursing home or long-term care providers and may disqualify you from being eligible for Medicaid (Medi-Cal in California) benefits. When set up correctly, certain Irrevocable Trusts can shelter assets and protect them for a surviving spouse or other beneficiaries.
We advise clients who want to shelter assets in an Irrevocable Trust that it’s too late to do so when they’re already disabled, because doing so could be construed as a fraudulent conveyance.
Special Considerations
In every trust we draft, our office recommends that clients consider all the possible tax consequences a large disbursement from an Irrevocable Trust might have on beneficiaries. Distributions are taxable to beneficiaries at ordinary income tax rates.
If a child later becomes disabled, an automatic disbursement of a certain size may exceed the income limits allowed for the child to qualify for government benefits needed to cover the cost of medical or long-term care.
There’s also the possibility that any money you put into an Irrevocable Trust might be needed later in an emergency but would be unavailable to them.
A Variety of Options
There are several variations of Irrevocable Trusts that are written to accomplish specific goals. Among the various types are Special Needs Trusts, Charitable Remainder Trusts, Irrevocable Family Trusts, Generation-Skipping Trusts, Irrevocable Life Insurance Trusts, etc. Each carry different benefits.
If you have questions about these strategies, please contact us and we’d be happy to review them with you.