In our last article, we compared estate planning to a toolbox filled with various tools. We wrote about the differences between a will and a revocable trust and why a revocable trust could have the advantage depending on your personal situation. In this article, we take it a step further and discuss why you might use an irrevocable trust instead of a revocable trust.
What is an irrevocable trust?
Simply stated, an irrevocable trust is an agreement signed by an individual (also known as the grantor) which names a person(s) as beneficiary(ies) and/or a corporation as a trustee. Unlike a revocable trust, assets contributed to an irrevocable trust no longer belong to you. You may give away your rights to change the beneficiaries or manage your assets. If the thought of losing control may be of concern to you, think about the benefits of doing so.
What are the benefits of an irrevocable trust?
By choosing an irrevocable trust, you may protect your assets from creditors, estate taxes, and in the event that you require nursing home care, your assets will not be depleted. You may not be required to pay for what could be an exorbitant expense. By giving up control, you actually gain financial freedom. Let’s look at the benefits more closely.
If you work in a profession that opens you up to potential liability and you are concerned that a frivolous lawsuit could wipe out your assets, consider an irrevocable trust.
If you have substantial assets and large life insurance policies, your estate may be subject to additional estate taxes upon your death. It may make sense to create an irrevocable life insurance trust to own those policies. If done correctly, the proceeds of those life insurance policies will not be part of your estate for estate tax purposes.
If you own significant real estate assets or business interests, and if your lifestyle is changing, you may want to consider transferring ownership interests in those entities to younger family members. This may also reduce the estate taxes payable upon your death. Transferring those interests to irrevocable trusts created for your children or grandchildren may better protect those assets from what life may have in store for the next generation.
If you are positive about your selection of beneficiaries and trust your trustees and know you will not want or need to make changes during your lifetime, then an irrevocable trust is a good option. It may also minimize the necessity of probate. An irrevocable trust has finality to it, and that can provide a grantor with peace of mind.
If you recognize that we cannot control our life circumstances, the irrevocable trust is an estate planning tool to consider. You and/or your spouse may need nursing home care. If your assets are in an irrevocable trust, your funds may not be depleted paying for nursing home care, nor would you be forced to sell your home to pay for that care. In essence, since those funds no longer belong to you, they cannot be taken from you.
To summarize, the loss of control that may be felt at the onset of signing an irrevocable trust, depending on your situation later in life, may be the decision that provides you with the most freedom and sense of peace.
What should you do?
As you enjoy your life and head towards your retirement years, your family circumstances may change as well. Those main events include second marriages or having a disowned family member or the addition of heirs. Life is a fluid process, and consulting from time to time with your estate planning attorney to discuss changes in the law, your lifestyle and your needs is the best way to control as much as you possibly can.
If you would like to further discuss your estate planning, please do not hesitate to send us an email. Our Trusts and Estates team can help you via zoom or skype, as you remain safe in the comforts of your own home. Please keep yourself and your family safe and keep smiling. We will get through this.
Have a happy and healthy new year.
Mr. Pond is a Partner and Co-Chair of the Trusts and Estates Practice Group at Certilman Balin. His team assists clients in every aspect of estate and tax planning, estate administration, probate law, litigation and elder law. Contact him at firstname.lastname@example.org.