Planning what will happen to your estate when you are no longer around can feel overwhelming. Among the many challenges you may face is the question of what the tax implications of the transfer of assets might be for you or your heirs. Fortunately, an irrevocable trust is a useful tool that has significant tax benefits for both the creator and the beneficiaries of the trust.
As with most financial tools, irrevocable trusts have their drawbacks as well. Having a full understanding of the advantages and disadvantages of irrevocable trusts can help you make an informed decision as to whether they might be a useful part of your estate plan.
What Is an Irrevocable Trust?
An irrevocable trust removes taxable assets from the grantor’s estate and transfers them into a trust under the control of a trustee. When the trust is created, the grantor sets up specific conditions under which the assets should be distributed to the beneficiaries.
The key provision that gives an irrevocable trust its name is that once the grantor places an asset into an irrevocable trust, they are then unable to revoke the trust, remove the asset from the trust, or change the list of beneficiaries. In other words, except for in certain rare circumstances that generally require the approval of both the court and the beneficiaries, the grantor permanently loses any legal ownership claims to those assets as soon as the trust is created.
The inability to change an irrevocable trust is one of its main downsides. However, some people will find that the benefits greatly outweigh the drawbacks.
What Are the Benefits of an Irrevocable Trust?
An irrevocable trust offers many advantages when it comes to planning and distributing an estate. These include:
- Taking advantage of the estate tax exemption – Once a property has been transferred to an irrevocable living trust, it is no longer included in the gross value of an estate. This can be particularly helpful for minimizing the tax liability of estates that are very large.
- Spendthrift protections – The grantor of the trust can stipulate specific conditions for when and how the assets should be distributed. For example, a parent may decide that a child who is a beneficiary should not receive the assets until they have reached a certain age, so that the child does not misuse the money they inherit.
- Protection against creditors – Courts generally rule that since beneficiaries are not capable of voluntarily transferring the future rights of the trust to another person, creditors should not be able to confiscate these assets.
- Preserving income – An irrevocable trust allows the grantor to put assets into their trust while simultaneously retaining the income from those assets.
- Protecting asset value – Appreciable assets that are placed into an irrevocable trust are removed from the estate while also giving beneficiaries a step-up basis for purposes of appraising the assets for tax purposes.
- Transferring a home – An irrevocable trust allows you to gift a principal residence to your children under tax rules that are far more favorable to them.
- Protecting life insurance proceeds – You can house a life insurance policy in an irrevocable trust as a way of removing the death proceeds from the estate.
- Qualifying for government benefits – Placing a large proportion of your assets into an irrevocable trust can ensure that you are eligible for Social Security income and Medicaid for nursing home care. You can also set up an irrevocable trust for a special needs child in order to keep any assets they inherit from disqualifying them from government benefits.
While these benefits may make an irrevocable trust a great solution for your estate plan, it is important to recognize that setting up this type of trust is a complex process. For this reason, it is important to work with an estate planning attorney who has experience creating irrevocable trusts. You can have the peace of mind that your assets are being managed in a careful manner that is tailored to your family’s specific needs. Contact us today.
Contact an Experienced Dallas Estate Planning Attorney
If you feel that an irrevocable trust is a good option for your estate planning needs, or if you have more questions about how they work, the seasoned Dallas estate planning attorneys of Staubus and Randall are here to help. Our skilled and knowledgeable lawyers have helped many clients create irrevocable trusts to ensure that their families can receive their assets without unreasonable tax burdens. Contact us today for a consultation, and we will let you know what all your estate planning options are. Call us now at 214-691-3411.