Defining an Irrevocable Trust and When to Consider One - Adviser Investments

Defining an Irrevocable Trust and When to Consider One

February 15, 2022

An irrevocable trust is an advanced estate planning tool that helps protect your assets and minimize tax obligations. Specifically, assets are removed from your estate and placed into a trust, whereby you transfer control and ownership of the assets.

Key advantages of using this legal instrument include lowering estate taxes as well as income tax and creditor liabilities. Irrevocable trusts also allow you to specify how your estate’s assets will be handled and handed down.

Is an Irrevocable Trust Really Irrevocable?

Yes and no. The grantor may not make changes or terminate the trust without the permission of the trust’s beneficiaries. However, the “trust protector,” assigned upon the trust’s inception, may make changes within certain limitations.

Specifically, the types of changes allowed are defined in advance, and they must adhere to state and federal guidelines. Courts may also make changes to irrevocable trusts.

What Can an Irrevocable Trust Be Used For?

Key uses of an irrevocable trust

Irrevocable trusts are part of an overall estate and wealth management plan and have four key uses:

1) Estate Tax Reduction: Generally, assets held in an irrevocable trust do not count toward an estate’s total value, ultimately reducing tax liability.

2) Legal Protection: Moving assets into an irrevocable trust means you no longer own them and, therefore, they are protected from your creditors. Keep in mind, the trust must exist before a legal action occurs.

3) Legacy Planning: An irrevocable trust can help you distribute assets to your heirs with distribution conditions. For example, if you’re concerned about a beneficiary’s financial responsibilities, you can limit the beneficiary’s distribution to monthly payments rather than a lump sum upon your death.

4) Medicaid Eligibility & Other: Shifting assets into an irrevocable trust may reduce your income, helping you meet income program limits for Medicaid and Supplemental Social Security Income. Beware, Medicaid long-term care benefits have a look-back period (60 months in most states). Therefore, be sure to transfer your assets well before completing an application.

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When to Consider an Irrevocable Trust

Before considering an irrevocable trust, it’s important to ensure you no longer need these assets, since you can’t change or revoke the trust once it’s established. You also surrender all ownership rights, and control is passed over to the trust’s trustee, typically a close friend, family member, business associate or attorney.

Beyond the four key uses above, other reasons to consider irrevocable trusts include:

  • Gifting a principal residence to loved ones.
  • Maintaining a life insurance policy, ultimately removing the death proceeds from your estate, aka an Irrevocable Life Insurance Trust.
  • Holding business ownership, reducing your family’s exposure to business debt obligations.

Next Steps

Establishing an irrevocable trust and understanding related tax implications can be complicated. Therefore, it’s important to seek guidance from experienced financial professionals who know the latest tax laws, estate planning and wealth management strategies. Contact Adviser Investments anytime for assistance. We’re here for you.

For more on trusts, listen to our podcast (Your Legacy’s Instruction Manual: Trusts and How to Use Them).

 


Tax and legal information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice.  Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice. Always consult a licensed attorney or tax professional regarding your specific legal or tax situation.

Our statements and opinions are subject to change without notice.  All investments carry risk of loss and there is no guarantee that investment objectives will be achieved.

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