Irrevocable trust document on the clipboard and gavel.

Contrary to popular belief, trusts are not only for the wealthy. They are an essential part of any comprehensive estate plan. One particular type, the irrevocable trust, offers both advantages and disadvantages. If you’re ready to begin working on your personalized estate plan, it’s time to speak with an experienced attorney who can guide you through the process. Turn to Patrick, Harper & Dixon’s Estate Planning & Administration team.

What Is An Irrevocable Trust?

With an irrevocable trust, the grantor (the person who created the trust) irrevocably transfers property and assets, which are then managed by a trustee for the benefit of others (known as beneficiaries). The grantor relinquishes all rights to the property. He or she has no right to terminate, revoke, or modify the trust in any way. The trustee is obligated to manage the trust in accordance with its terms and has considerable authority to do so.

The primary difference between irrevocable and revocable trusts is the control of assets. Grantors can remove property from a revocable trust, and the trust itself can be revoked (hence the name). With an irrevocable trust, however, the assets and property transferred into it are considered to be the property of the trust itself rather than the grantor. Even though the grantor no longer owns property transferred into an irrevocable trust, the trust can be set up to allow the grantor continued use of it for the remainder of his or her life.  Different tax and benefits consequences can result from these various decisions.

Benefits of An Irrevocable Trust

This legal arrangement offers a number of estate planning advantages, including:

Protecting against creditor claims and lawsuits. Since assets held in irrevocable trusts are considered owned by these trusts, they are not considered the property of the grantor. They are therefore generally protected against such claims, if the assets funding the trust are not the assets of the grantor, and the grantor did not retain a right to access the assets.

Minimizing estate taxes. Irrevocable trusts are separate legal entities and pay their own taxes on income generated by their assets. The property in the trust, not being owned by the grantor, does not add to the grantor’s estate taxes, with some exceptions.

Benefits to married couples. Spouses, in particular, should consider using an irrevocable trust. One reason is what’s known as the unlimited marital deduction. When a spouse dies, assets can be transferred to the surviving spouse via the trust to protect against future marriages and ensure that the children of the couple are the ultimate beneficiaries of an estate.

Asset protection from long-term health expenses. When a grantor transfers assets into an irrevocable trust, thereby relinquishing his or her ownership over them, the grantor reduces the amount of assets he or she personally owns. Fewer assets increase the likelihood that the grantor will be able to qualify for Medicaid and other forms of public assistance.

Care for special needs beneficiaries. An irrevocable trust can be designed to provide support for beneficiaries who have special needs or disabilities. This can be done in a way (known as a first-party special needs trust or a third party supplemental needs trust) that the assets and property held in the trust do not count against the beneficiary, who can then qualify for public assistance.  

Control over how and when beneficiaries acquire trust assets. One benefit of trusts in general is the ability to prevent irresponsible beneficiaries from wasting trust property. You may be concerned, for example, that an immature heir to your estate will waste any money he or she inherits. The trust can dictate that this individual not receive any trust assets until reaching a certain age or milestone (like graduating from college).

Probate avoidance. Most estates need to undergo an expensive, time-consuming, and sometimes stressful process known as probate before heirs can inherit property belonging to the decedent. Irrevocable trusts are not subject to probate.

Drawbacks of An Irrevocable Trust

There are disadvantages to any type of trust you select. For irrevocable trusts, they include:

Loss of control. The fact that assets transferred into trusts are no longer owned by the grantor is arguably the biggest drawback. As mentioned above, however, there are ways to use the assets without controlling them. You can also exercise some control over the property by selecting the individual who will be your trustee.

Inflexibility. A related problem is the inflexible nature of irrevocable trusts, owing to the fact that the terms cannot be altered. This limits the grantor’s ability to adapt to certain life changes, such as remarriage.

Medicaid’s five-year lookback period. Although assets can be placed into a trust to make an individual eligible for Medicaid, this must be done more than five years before the grantor applies for Medicaid. Assets placed in the irrevocable trust during this five-year lookback period will count against the grantor. This is all the more reason to set up an irrevocable trust sooner rather than later.

Separate tax filing. Since the irrevocable trust is a separate legal entity, it must also file its own tax return. This is one of the main responsibilities of the trustee, so be sure you are prudent in selecting a trustee.

Contact Our Hickory Irrevocable Trust Attorney

In designing your unique estate plan, it is essential that you understand the pros and cons of each element you wish to include in it, such as irrevocable trusts. The first and most important step you should take is to connect with an experienced Estate Planning & Administration attorney. Give Patrick, Harper & Dixon a call today.