You might already know that a Trust is a tool that takes assets out of your name, holds them on behalf of a beneficiary, and distributes them according to your wishes. For estate planning purposes, most people set up Revocable Living Trusts and appoint themselves as Trustee. This means they still have total control of the assets while they are alive, and they will be passed on to the beneficiary or beneficiaries upon their death without going through Probate. The terms of the Trust will reflect your wishes for how and when the assets are distributed. For example, you might not want your children to get the bulk of their inheritance until they have reached a certain age—this can be arranged through a Trust.
However, a Revocable Living Trust does not protect your assets from certain taxes and from lawsuits. If this is your goal, you will have to set up an Irrevocable Living Trust.
What Does “Irrevocable” Mean?
Just as the name implies, an Irrevocable Living Trust cannot be revoked or changed once it is established. When you put your assets into this type of Trust, they are no longer your assets. Instead, they belong to the Trust and are controlled according to the terms of the Trust by the Trustee you have appointed. As the Grantor of the Trust, you determine the terms of the Trust and can transfer the assets you choose into it, including cash, property, business investments, and life insurance policies. There are different types of Irrevocable Trusts, and you should consult an attorney and financial planning professional to determine which type will best meet your needs.
Advantages of an Irrevocable Living Trust
So why would anyone want to put their assets into a Trust that they cannot access or change? The main advantages people seek by establishing an Irrevocable Living Trust include:
- Tax savings. When you place assets into an Irrevocable Living Trust, you remove them from your taxable estate, which could lower your tax burden. This is particularly advantageous if you have a sizable estate.
- Creditor and lawsuit protection. Assets held in an Irrevocable Trust cannot be seized by creditors if you have debts or declare bankruptcy. If you work in a litigious profession, such as medicine or law, you can protect your assets from liability by placing them in this type of Trust.
- Multi-generational planning. By establishing certain terms, you can use the Trust to build wealth and pass it on to your children and grandchildren.
- Planning for long-term care. When assets are secured in an Irrevocable Living Trust at least five years before you need long-term care, you might be able to qualify for Medicaid to pay for a facility and protect your assets for your heirs.
This type of Trust is not right for everyone, but you can discuss its advantages with an estate planning and asset protection attorney. If the disadvantages outweigh the benefits, you might want to consider a Revocable Living Trust.
Disadvantages of an Irrevocable Trust
The biggest downside to this type of Trust is the inflexibility once it is established. While you can set up the Trust so that you receive income from it during your lifetime, you do not have control of the assets and, if you find yourself in a financial bind in the future, you cannot access the funds in the Trust. To change the terms of an Irrevocable Living Trust, you would need agreement from all of the beneficiaries
Ross & Shoalmire Will Help You Choose the Best Tools for You
If there is a good reason to utilize an Irrevocable Living Trust in your estate plan, our team will explain the advantages and help you draft one that accomplishes all of your goals. If a Revocable Trust is sufficient to meet your needs, we will help you take that route. Either way, some type of Trust is essential in a comprehensive Estate Plan. When you meet with our team, we will walk you through the process and help you protect your assets and provide for future generations.