“Do I need an irrevocable trust?”

Many of our Members are starting to solidify their estate plans, ensuring their wealth is taken care of in the future. One question we get a lot is, “should I have an irrevocable trust?” The answer is, it depends. The main reason most people create a trust is to avoid the probate process, which can be long and complicated—so why put your family through that?

What is an irrevocable trust?

An irrevocable trust is like a financial safe deposit box you can't easily unlock once it's closed, because you give the key to someone else. You’re giving control of your assets to a trusted friend or advisor (in this case, a trustee) who promises to take care of them and eventually pass them on to your chosen loved ones or causes (beneficiaries), according to rules you set at the beginning. And you can not change those rules.

There are two types of irrevocable trusts (which are also both available as revocable trusts).

• Living - The trusts are created and funded during the grantor’s lifetime.
• Testamentary - These types of trusts are designed for the grantor’s assets to be placed in their trust after their death and are funded as directed in the will.

The main difference between an irrevocable trust and a revocable trust is that once these rules are set and the trust is funded, you can not access the funds—they are in the trustee's control. Because of this, irrevocable trusts offer tax benefits that revocable trusts do not.

Why would I set up an irrevocable trust?

There are a few reasons you might consider setting up an irrevocable trust. Chief among them are:

• Minimizing Estate taxes. Assets transferred into an irrevocable trust no longer count against your estate value, and can lower estate taxes. The grantor of the trust is also exempt from tax liability of any income generated by the assets within.
• Protect assets from legal judgments. If you work in a field likely to be subject to lawsuits, having your assets in an irrevocable trust is one way to shield them.
• To reduce your assets in order to ensure eligibility for government benefits, such as Social Security income and Medicaid (for nursing home care). For those of you with aging parents, this is something you may want to consider.

It’s important to weigh these benefits against the rules and risks associated.

What are the rules?

The rules can be quite stringent. Once you transfer assets into the trust, they're no longer yours. They belong to the trust and are managed by your trustee. After you set it up, changing your mind isn't simple, hence 'irrevocable'. Depending on the asset, there are different actions you may need to take, for instance:

• If the asset is a house, you must execute a new deed giving it to the trust.
• If the asset is a car, you must transfer the title to the trust.
• If the asset is a bank account, you must transfer the funds to a new bank account in the name of the trust.

An irrevocable trust cannot be modified, amended, or terminated without the permission of the grantor's beneficiary or by the order of a court.

Also be aware that additional costs and tax implications can accompany an irrevocable trust:

• The setup and maintenance can involve legal costs and complexities.
• Your contributions to the trust are considered a “gift” and are therefore subject to “Gift” taxes. Amounts below $18,000 (or $36,000 for couples) qualify for the annual gift tax exclusion in 2024. Anything beyond that, and you’ll likely need to file Form 709 and potentially pay a gift tax depending on your available unified credit.

In conclusion.

Irrevocable trusts can be a valuable tool for ensuring your estate is in order and future generations are taken care of. The reality is, in most cases, a revocable trust does the trick until you start to truly amass a large enough net worth to start running into estate tax problems. Before jumping in to creating an irrevocable trust, it's crucial to weigh the pros and cons and consider your financial situation and goals. It’s always a good idea to chat with you financial advisor or an estate planning attorney to see what's right for you.

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Related Content:

Do You Need A Revocable Living Trust? Here are 3 Reasons to Consider One

How can I set up my child for financial success?

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