What is an irrevocable trust?
One might argue that an irrevocable trust solves most of the issues of a will and a revocable trust, with only one drawback: the trust is irrevocable. An irrevocable trust is the same as a revocable trust except that once the assets are put in the trust, they are no longer owned by the grantor. If done correctly, the grantor has no direct control (except some limited control allowed by the courts) over the assets. Basically, the grantor creates the trust documents describing the rules surrounding the assets and the beneficiaries, makes a completed gift to the trust. The trustee then manages the assets in the trust using the grantor’s instructions.
What are the advantages of an irrevocable trust?
Estate planners use the irrevocable trust to accomplish a myriad of goals employing many different types of irrevocable trusts. The irrevocable trust has all of the advantages of a revocable trust, but, since it is a completed gift, offers several different types of protection from creditors during the grantor’s lifetime and until the trust ends.
Because the grantor cannot directly control the assets in the trust, neither can the grantor’s creditors (subject to “look back” periods). If a grantor should be sued, the successful plaintiff cannot attach assets in the trust because the grantor does not own them and cannot directly control them.
Similar to the revocable trust, when the right language is used, the assets are safe from attacks on the beneficiaries’ assets also. Several irrevocable trusts offer a reduction in estate tax also. Because the government allows a lump sum exempt gift, then the gift can be made to the trust. The government also allows a yearly gift that can also be made to the trust. Because both of these gifts are completed gifts, the death of the grantor does not trigger estate tax.
Placing a business in an irrevocable trust can also be advantageous. If the business is gifted into the trust when it is valued at less than the gift tax exemption limit, it will avoid the gift tax as well as the estate tax regardless of how large or successful the company may become while inside the trust. Again, this is because the gift was “completed” when the value was low.
Another advantage of an irrevocable trust is that it is not subject to the Medicaid spend-down amount (subject to a “look back” period). Because the grantor does not own the assets, they may qualify for Medicaid thereby protecting those assets for the beneficiaries. Many, many other types of irrevocable trusts accomplish different objectives and one should consult a professional to make certain you are executing a trust document correctly.
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Rocco Beatrice, CPA, MST, MBA, CWPP, CAPP, MMB - Managing Director, Estate Street Partners, LLC. Mr. Beatrice is an "AA" asset protection, Trust, and estate planning expert.
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