Is an irrevocable trust a wise choice for you?
A trust fund is a legal setup in which three people are involved: the grantor, the beneficiary, and the trustee. The trustee is the person or organization responsible for making sure that the trust is administered as the grantor intended. There are many reasons for establishing trusts of various types, for example to prevent the risk of leaving a large sum of money to a child who may spend it recklessly.
In a great many cases, careful estate planning involves establishing one or more trusts. By choosing a highly skilled, experienced estate planning attorney, you can ensure that both your assets and your heirs are well-protected.
An irrevocable trust has many advantages since it can shield your assets from estate taxes and legal liability and can assist you in meting out your assets to a beneficiary is a distinct manner. Because irrevocable trusts are permanent, however, and in technical terms do not any longer “belong” to you, setting up an irrevocable trust should never be undertaken lightly.
What is an irrevocable trust?
Irrevocable trusts, of which there are several types, cannot be modified during the lifetime of the grantor. A qualified personal resident trust (QPRT) can hold the grantor’s primary or secondary residence and reduce its taxable value for estate purposes whereas a grantor retained annuity trust (GRAT) can potentially allow money to be transferred to heirs without any estate tax liability. Testamentary irrevocable trusts, on the other hand, are created and funded after the grantor’s death based on the terms of the will.
Advantages of an Irrevocable Trust
Advantages of an irrevocable trust include the following:
- Legal protection
Because you no longer “own” the assets, they are protected from bankruptcy and insolvency laws. Assets in an irrevocable trust offer you greater protection from creditors and from any party seeking a judgment against you.
- Estate planning
Since an irrevocable trust does not usually count toward the value of your estate, putting certain assets into such a trust can reduce the tax burden on your heirs. This is only helpful, however, if your estate is substantial since estate taxes are only charged on estates worth more than $5.45 million.
- Qualifying for benefits
Creating an irrevocable trust can be extremely advantageous if, later in life, you require home healthcare. You may be able to avoid compulsory depletion of your assets to obtain Medicare or Medicaid benefits since your assets are no longer considered in your ownership.
- Preventing misuse of assets
As mentioned in the example of the potentially irresponsible heir, an irrevocable trust can ensure that your assets are distributed to your beneficiaries according to your specifications.
Is there a downside to an irrevocable trust?
The disadvantage of such a trust is spelled out in its name: irrevocable, meaning you no longer have the ability to make changes to it during your lifetime. This is only a disadvantage if you aren’t completely positive about your wishes at the time you create the trust.