The word irrevocable evokes permanent, set-in-stone arrangements. And that’s exactly what it means in describing this type of trust. Once you establish and fund an irrevocable trust, there’s no going back (except for in very rare circumstances, such as a charitable trust needing to change to stay compliant with shifting legislation).
But why would anyone want to create such a permanent legal structure for their assets? Because trading in your flexibility can bring serious benefits.
Any type of trust follows the same basic principles: It’s a legal arrangement between the grantor(the person who sets the agreement), the trustee (the person who manages the trust), and the beneficiary (the person who receives the assets from the trust). The grantor establishes all of the rules of the trust and then puts assets into the trust. Those assets are managed by the trustee to benefit the beneficiary.
You can put any type of asset you want into a trust—from a vacation home to family heirlooms, an investment portfolio to life insurance policies. And, as the grantor, you can also set whatever parameters you like over who gets the money and when. You could earmark funds for specific purposes (such as buying a home or paying for college) and stagger distributions over time. That can be especially appealing if you worry about your heirs coming into a lump sum inheritance all at once.
But what’s particular to an irrevocable trust is that once you establish a trust and transfer an asset into it, you can’t change your mind or revoke the trust. It’s binding. So if you go this route make sure you fully understand what you’re agreeing to and you’re ready to make that type of commitment.
What are the benefits of having an irrevocable trust?
Irrevocable trusts can mean big tax advantages. When you put assets into an irrevocable trust, they’re no longer considered part of your taxable estate, because you don’t have any way to reclaim those assets. For some people, that can mean a significantly lower bill when it comes time to pay federal estate taxes and possibly state estate and inheritance taxes.
Assets in an irrevocable trust also won’t count when you apply for government benefit programs with asset or income limits, such as Medicaid.
Irrevocable living trusts can also protect your assets from lawsuits and creditors. If, for instance, you’re sued and the plaintiff is awarded a large settlement, the assets in the irrevocable trust can’t be claimed as part of the settlement.
What are the drawbacks?
Again, once you set up and fund an irrevocable trust, you can’t change your mind. You’ll want to be 100 percent certain before making this move.
How do you set one up?
This is one area where DIY does not make sense. Meet with an experienced estate attorney to talk through your financial situation, how you’d like the trust established, and exactly how you want your assets distributed. Keep in mind that you’re not able to make changes in the future, so you don’t want to rush this process. While attorney fees vary, the process generally runs about $1,500.
By Kate Rockwood
