An irrevocable trust is a specific category of trust with terms that cannot be changed or modified in any way without the express permission of the grantor’s beneficiaries. By placing assets into the trust, the grantor officially transfers ownership of those assets to the trust.
Depending on what you are trying to accomplish, an irrevocable trust is typically less flexible than a revocable trust. That does not mean it is not without its benefits.
Here is an overview of what you should know about implementing an irrevocable trust in your estate plan.
The biggest benefit of using an irrevocable trust for estate tax planning is that it removes ownership, which means any assets you place in the trust cannot count against your taxable estate. For some irrevocable trusts, it also removes the tax liability on any income generated by the assets.
These types of trusts are commonly used by high-net worth individuals and individuals who work in fields that are more likely to attract lawsuits. Doctors and lawyers, for example, are at a higher risk of lawsuits and thus tend to use mechanisms like irrevocable trusts to protect themselves.
5 Purposes for an Irrevocable Trust
Irrevocable trusts can be used for the following purposes:
1. Prevent the Misuse of Assets
As the grantor, you are allowed to use your irrevocable trust to set terms and conditions for the distribution of trust assets. This prevents your beneficiaries from misusing them.
2. Reduce Taxes
Placing assets into an irrevocable trust reduces your taxable estate, as they no longer count toward your net worth. If you are close to the estate tax threshold, you can use irrevocable trusts to get your estate below the threshold so that estate taxes will not apply.
3. Become Eligible for Government Benefits
If you need to reduce the value of your estate to qualify for Social Security income or Medicaid (especially if you need nursing home care), irrevocable trusts can be a reliable tool to help you accomplish this.
4. Retain the Income Generated from Assets
Irrevocable trusts can be used to bequeath assets to your beneficiaries while still retaining any income those assets generate. This is especially important for stocks, retirement accounts or other items that grow in value over time.
5. Transfer life insurance policy
An irrevocable trust can be used to hold a life insurance policy. This would potentially remove the death proceeds from your estate.
If you require a bit more flexibility or believe you may change your mind about transfer of your assets, a revocable trust to be more appropriate for your goals, especially if spending down for Medicaid/MassHealth or avoiding estate tax is not an issue for you.
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We would be pleased to work with you and your family to establish, change, or improve your estate plan to best protect your family and assets. Our experienced estate planning attorneys can help ensure your plan meets your wishes.
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Baker Law Group P.C.
Hingham – Brockton – Holliston – Plymouth