If you’re considering estate planning beyond using just a simple will, and have been told that a revocable trust is the only kind of trust you should ever consider, then it’s time for a second opinion. While revocable trusts are fantastic tools that can help you to avoid probate, secure efficient distribution of assets when you die, and maintain control over those assets during life, they are far from perfect. More importantly, there are a host of benefits that they simply cannot provide. To get a better understanding of how limited the revocable trust can sometimes be, just consider the many benefits offered by an irrevocable trust.
What’s the Difference?
Besides the two-letter difference in the name, these two trust types part company in a variety of ways. Yes, they both provide you with an opportunity to transfer ownership of assets out of your own name, and they both avoid probate by providing a means for distributing assets without the need for court supervision. Those comparative similarities, however, are nothing compared to the different benefits that you can enjoy with the irrevocable trust.
Most of these benefits are the result of the one very different feature that an irrevocable trust offers. Because you cannot simply revoke or alter an irrevocable trust at will, the transfer of ownership you achieve by using these trusts is considerably more complete. After all, you can simply revoke a revocable trust whenever your life circumstances require it, and thereby regain control of those assets. And since you can name yourself as trustee of the revocable trust, you never actually give up control over those assets anyway. That’s why you don’t receive creditor protection and a full range of tax benefits when you’re relying on the revocable trust; since you have access to the assets, so do your creditors.
That’s not the case with the irrevocable trust, however. Since you cannot exercise control over the assets once you transfer ownership, and you cannot revoke the trust, those assets are often beyond the reach of creditors and tax agencies – and can even be discounted when you apply for various government benefits.
What are Some Examples of these Benefits in Action?
Perhaps the best way to understand how an irrevocable trust can benefit you is to see some examples of how these trusts are used. As you’ll discover, they can help you to achieve a variety of different estate planning objectives.
Medicaid Planning: With nursing home costs now higher than they have ever been, the need for Medicaid assistance to cover those expenses has never been greater. Of course, that means being able to qualify for program benefits – which in turn means that you must meet stringent asset and income requirements. Many seniors find that their income or assets exceed those levels, and that can force them to spend down their wealth to get below the limits or forgo the assistance altogether. By using an irrevocable trust, those seniors can simply remove those assets from their estate. That helps them to secure the eligibility they need.
The Irrevocable Life Insurance Trust: While most people simply assign beneficiary designations to life insurance policies – ensuring that their policy payouts go to certain specified heirs when they die, sometimes policyholders with large estates want to reduce any estate tax liability by ensuring that those policies are not owned by them. By having the irrevocable trust purchase and hold the insurance policy, that goal can be achieved and estate taxes related to the insurance proceeds can be avoided.
Charitable Trusts: If you want to continue to support your favorite charities and still have your beneficiaries receive some benefit from the assets you donate, charitable trusts can be a creative way to accomplish those objectives. There are different options from which to choose, and they take different approaches to providing support:
- Charitable Remainder Trust. Typically, grantors donate assets to the trust, which enables them to avoid capital gains taxes that would result from their sale. The trust can then sell those assets and purchase different assets that can generate regular income. The beneficiary of the trust can then enjoy the benefit of that income for a specified period, after which the charity receives the remaining assets.
- Charitable Lead Trust. Like the remainder trust, this option allows donors to escape capital gains and other taxes by donating to the trust. Unlike the remainder trust, the charity receives the income generated by assets in the trust for a set period. At the end of that time, the remaining assets are distributed to the trust’s named beneficiaries.
Dynasty Trust: With the dynasty trust, you can execute a transfer of assets from yourself to your heirs tax-free, if those heirs are two-generations younger than you. Individuals can transfer as much as a million dollars this way, or twice that for couples. The transfer avoids taxes, and can provide a great way to remove assets from your estate to limit estate tax exposure.
And Even More…
Those are just a few examples of how irrevocable trusts can benefit your estate planning needs. There are obviously many other benefits that you can realize, if your trust is properly established and funded. To do that, however, you need the assistance of a professional trusts attorney, rather than some cheap downloadable form trust that you find on the internet. With the right legal assistance, you can ensure that your trust perfectly meets your estate plan needs.
At Frank & Kraft, Attorneys at Law, our experienced trusts attorneys can help to ensure that you receive the benefits of the irrevocable trust that’s perfect for your unique needs. We can work with you to evaluate your current circumstances and future objectives, and then help you select the trusts that will ensure that you reach your estate planning goals. Rather than just settle for a revocable trust that may or may not help you to achieve those goals, perhaps it’s time to give serious thought to the many benefits that your irrevocable trust could provide. To learn more about how we can assist you in that process, give us a call at (317) 684-1100 today, or visit us at our website.
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.