Irrevocable trusts are a form of trust that can be very difficult to change. When you transfer assets into an irrevocable trust, you may give up ownership rights over them. Some jurisdictions consider any trust to be irrevocable unless you specifically state otherwise in the document.
They have many advantages and disadvantages for estate planning purposes, as outlined below:
Irrevocable Trust Advantages
- Tax advantages: It can be designed to remove assets from your taxable estate, i.e. to essentially “freeze” the value of the assets you are transferring as of the date of the transfer. This technique is particularly effective when dealing with assets likely to experience high levels of appreciation. Also, it can be designed so that the grantor pays all of the income tax, thereby allowing assets within the trust to continue to accrue and appreciate for future generations or other loved ones. Furthermore, an irrevocable trust can be designed to avoid any future estate or GST tax, too.
- Multi-Generational Planning: They can be a fantastic way of building and maintaining wealth for future generations in a very secure manner.
- Creditor protection: Because you no longer control the assets held in trust, in most instances creditors cannot seize them should you run into problems repaying debt. This is a very effective form of asset protection.
- Some Flexibility is Possible: By utilizing features such as powers of appointment and Trust Protectors, it is possible to preserve some flexibility in an irrevocable trust.
Disadvantages of Irrevocable Trusts
- Loss of control: Once an asset is in the irrevocable trust, you no longer have direct control over it. However, in the case of a husband and wife, it is possible to create separate trusts for each, thereby collectively maintaining control. There are many pitfalls with this technique, such as observance of the Reciprocal Trust Doctrine, so this strategy should only be employed with the assistance of a skilled estate planning attorney.
- Fairly Rigid terms: They are not very flexible. Once the terms are established, they can be difficult to change.
- The Three-Year Rule: If you include life insurance in an irrevocable trust and pass away within three years, the proceeds return to your estate and become taxable.
- The Five-Year Rule: If you put assets in an irrevocable trust and need Medicaid within a five-year period, you may have to repay all prior transfers to the trust by covering the costs of a nursing home privately. Only after you have “repaid” all gifted assets will you be eligible for Medicaid.
Because they have such strong advantages and disadvantages, the suitability of an irrevocable trust depends on a person’s individual circ*mstances. An experienced estate planner can help you decide if such an arrangement is right for you, or if you would be better off setting up a revocable trust instead. Please contact us today to learn more!
