Trusts, which are defined in Olde English fashion by Black’s Law Dictionary as, “An equitable or beneficial right or title to land or other property, held for the beneficiary by another person, in whom resides the legal title or ownership, recognized and enforced by courts of chancery,” come in many flavors. They can be made for various reasons, including for estate planning. One major type of trust that can aid in estate planning is known as an “irrevocable trust.”
An irrevocable trust lets the trust’s creator determine ahead of time how the assets they own in life will be distributed during their lifetime (if at all) and following their death—without those assets ever having to go through the expensive hassle of probate. But there’s a caveat: once the trust is formed and the assets placed into it, the trust cannot be altered, and depending on the type of trust, the trust’s creator may not have any right to benefit from or access the assets in the trust. That’s the “irrevocable” of it.
But there are many flavors of irrevocable trust, too. These are generally split into two categories: irrevocable trusts meant to protect property, and and irrevocable trusts designed to reduce taxes.
Trusts designed to protect property—our specialty—include:
· Asset protection trusts – This type of trust immediately protects the assets in the trust from the trust creator’s creditors. Plus, five years after putting assets in the trust, the trust assets are protected from a Medicaid Long Term Care spenddown. These trusts are a powerful tool for people with very special assets to protect from loss (like a long held family home or vacation property) and for those worried about losing their home or other assets to long term care.
· Special needs trusts – These are designed to provide a loved one with special needs with goods, purchased for them by a trustee, that they might not otherwise be able to procure, while simultaneously not causing them to be ineligible for the governmental benefits upon which they rely.
· Spendthrift trusts – Designed to control gifts a person wants to give to someone who has difficulty managing money on their own. Rather than this person—the “spendthrift”—receiving the entirety of the gift at once, it is placed into a trust and doled out by the trustee to the beneficiary as stipulated in the terms of the trust. This also helps protect the gift from claims by the beneficiary’s creditors.
Among the irrevocable trusts designed to reduce taxes include:
· Charitable trusts – These trusts, which themselves come in various forms, can reduce income tax and estate tax (if that would apply to you) via gifts made to charity through the trust.
· Bypass trusts – Used by wealthy people, this decreases estate tax when the second spouse dies by placing the estate in a trust after the death of the first spouse. The second spouse can draw from it during the remainder of their life, but the assets in it never technically belong to them—they belong to the trust. Then, at the second spouse’s death, the trust passes to another designated beneficiary without the assets going through probate.
· QTIP and QDOT trusts – These can be used to put off the requirement to pay taxes on an estate until the second spouse in a couple dies—including (in the case of QDOT) when one of the spouses is not a citizen of the US. These are sometimes made in conjunction with bypass trusts.
· Life insurance trusts – Such trusts are made so the insured person can pass the proceeds from a life insurance policy to a trust without ever owning the policy, which means the assets do not become part of an estate and therefore are rendered not taxable.
· Grantor-Retained Interest Trusts – This permits a trust maker to place assets in a trust and, during their lifetime, continue to hold some interest in the trust for a set time and in a pre-determined fashion, after which the final beneficiary will own the assets completely. This trust is used as an estate tax planning strategy because the value of the transfer is determined based on when the trust was created and not at distribution.
Our Attorneys Can Help With Irrevocable Trusts
If you’re wondering whether an irrevocable trust might be right for you or for a loved one with disabilities, attend one of Promise Law’s free estate planning workshops. These workshops provide a great foundation of information that everyone needs to make sound planning decisions. Moreover, if you attend a workshop, you also get a complimentary one-on-one consultation with one of our attorneys.