In Focus: Irrevocable Trusts

Many individuals are aware of the importance of creating a will to ensure that their property is properly managed and distributed after they die.  However, a well-conceived estate plan will also consider other important goals such as asset protection, avoiding probate, and minimizing estate tax consequences. With the advice and guidance an experienced will and trusts attorney, you can achieve these objectives by establishing an irrevocable trust.

What is an Irrevocable Trust?

Generally there are two types of trusts, revocable living trusts and irrevocable trusts. In a living trust, the person making the trust (the grantor), transfers property into the trust, but continues to manage it during his or her lifetime. A living trust can help you plan for incapacity, and provide instructions for the distribution of your assets. Most importantly, unlike a will, a living trust does not go through a probate proceeding.

A irrevocable trust is different in that it becomes effective during the grantor’s lifetime and cannot be amended or modified. In this arrangement, the grantor permanently relinquishes ownership of the property, and designates a trustee to manage the assets for the benefit of the beneficiaries. The advantages of an irrevocable trust are (1) the property is not subject to estate taxes, (2) the trust is not required to be probated, and (3) the trust property will be protected from creditors

There are a variety of irrevocable trusts, including:

  • Bypass Trusts — In this arrangement, property of the spouse who dies first is transferred into a trust for the benefit of the surviving spouse. Because that spouse does not own the property, it is not included in his or her estate and therefore not subject to estate taxes.
  • Special Needs Trusts — Individuals who rely on public benefits such as Medicaid, Medicare or Social Security Disability, could forfeit these benefits if they receive an inheritance. A Special needs trust sets funds aside for day-to-day expenses of the beneficiary, but preserves his or her eligibility for public benefits.
  • Life Insurance Trusts — Although the proceeds of a life insurance policy are passed to the beneficiaries outside of an estate, the value of the policy is included in the estate for tax purposes. A Life insurance trusts takes ownership of the the policy, removes the proceeds from the estate and, therefore, minimizes estate taxes.
  • Charitable Trusts — By combining gifting with charitable donations, these trusts can reduce the grantor’s income and minimize estate taxes. In a charitable remainder trust for example, the grantor names another individual to receive trust income for a set period of time, afterwhich a charity is designated as the final beneficiary.
  • Spendthrift Trusts -– Designed to protect the assets passed to “troubled heirs,” such as  individuals who are incapable of managing their finances, have drug, alcohol or gambling issues, or being pursues by creditors. In a spendthrift trust, a trustee manages the funds, purchases goods and services for the beneficiary, makes payments directly to landlords and creditors, or distributes proceeds to the beneficiary in increments as needed.

The Takeaway

By establishing irrevocable trusts you can achieve a number of financial objectives, shield your assets from taxes and creditors, and protect your loved ones. At the same time, these are complex estate planning tools that are best prepared by an experienced wills and trusts attorney.