Estate planning can involve a great number of complex choices. Some are as simple as determining whether or not you actually want your estate to go through probate when you die, diminishing the value of the assets that you leave behind for your loved ones. If you want to avoid probate, however, then your choices can become more complicated – especially when it comes to the use of trusts. It is not enough to just decide that you need a trust to ensure that your assets are distributed properly without court involvement; no, you also need to decide which kind of trust would best accomplish your goals.
In many cases, people choose to utilize revocable living trusts to handle these issues. That revocable trust enables a person to transfer his assets into the trust, name himself as Trustee, and appoint a successor Trustee to take over control of the trust in the event he becomes incapacitated or dies. While there are many advantages to using that type of trust, it may not be right for you. Depending on your needs, you may actually discover that irrevocable trusts are the ideal choice for your estate planning strategy.
What is an Irrevocable Trust?
The best way to understand an irrevocable trust is to first understand what makes it so different from the revocable variety. With a revocable trust, you can maintain control over trust assets while you are alive, and revoke the terms of the trust at any time to return the assets to your ownership. That ability to maintain control is one of the trust’s most attractive features, and helps to explain why revocable living trusts have become so popular in many estate plans.
The irrevocable trust, on the other hand, requires that you give up not only ownership of your assets but control over them as well. Moreover, once you have signed over control and ownership of the assets, the decision cannot be undone. The trustee you assign to the trust has control over the trust, and must manage them in accordance with the terms set forth by you when you established the trust. That inability to directly control the trust, or revoke it if the grantor’s life circumstances change for some reason, is a major reason why so many people choose revocable trusts instead. However, there are ways to maintain control over how those assets are used after you give up ownership, while still gaining the tax and other benefits that an irrevocable trust can provide.
Use the Trust Terms Wisely
The key to maintaining some level of control over how assets are used is found in the actual terms of the trust. Depending upon how you write those terms, you can have provisions that can ensure that your trust continues to provide benefits to you during life even as it cares for your loved ones after you are gone.
- Provisions can provide for any income-generating assets owned by the trust to continue to provide regular income to you throughout your life. That can be a great way to avoid the tax implications of those assets, while still enjoying the benefit of that ongoing income. Meanwhile, the assets themselves are generally considered to be safe from civil judgments and unexpected creditors, since they are no longer yours. Any income paid to you by those assets, however, would still be subject to lawsuits or other creditor actions.
- Your trust terms can be used to determine how your heirs receive their inheritance. If you have an heir who has difficulty managing money, you can provide for regular and ongoing distributions when you die rather than one large sum.
- If you ever need Medicaid to cover the expenses associated with nursing home care, assets contained in your irrevocable trust are not counted during the eligibility process. If you choose a revocable trust, Medicaid would require that you take ownership of any assets in that trust and use them to pay your own expenses prior to receiving any program benefits. It is important to note, however, that any assets you place into an irrevocable trust must be transferred outside of the program’s five-year look-back window so that the transfers don’t trigger Medicaid’s ineligibility penalties.
- Assets that are owned by your irrevocable trust are legally considered to be outside of your estate. That means that they do not get counted as part of your estate for estate tax purposes. That is not the case with a standard revocable trust.
- Used properly, your irrevocable trust can protect your estate assets without disrupting your lifestyle in any noticeable way. While you will lose the ability to liquidate those assets should your life circumstances change, proper planning can minimize any risk of serious disruption.
Doing it the Right Way
Naturally, every person is different and your unique needs should determine the various elements of your own estate plan. If you decide to utilize an irrevocable trust, however, it is important that you do it the right way. That requires professional legal assistance to ensure that the trust is created properly, and that all of the provisions are set forth in a way that accomplishes your goals. As you might expect, there are a whole host of free and low-cost forms available for anyone who wants to try to do this on his or her own. The problem is that even minor mistakes could result in major problems down the road, and no form can ever take the place of well-crafted legal documents tailored to your unique needs.
The professionals at Frank & Kraft, Attorneys at Law, understand how important it is that your irrevocable trust be created in a way that provides you with maximum protections and benefits. We have the expertise you need to establish your trust the right way, so that you never have to wonder whether your estate planning will accomplish your objectives. Contact us at our website or give us a call at (317) 684-1100 today to learn more about irrevocable trusts and how they can enhance your estate planning efforts.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.