Advantages and Disadvantages of an Irrevocable Living Trust
Your Last Will and Testament likely serves as the cornerstone of your estate plan; however, it is also likely that you will include additional estate planning tools and strategies into your plan to make sure you achieve all your estate planning goals. One of those additional tools may be a trust. If you choose to include a trust in your estate plan, you will need to decide if that trust will be revocable or irrevocable. An Indianapolis attorney at Frank & Kraft discusses the advantages and disadvantages of an irrevocable living trust.
Trust Basics
A trust is a legal arrangement that lets you (the “Settlor”) appoint a Trustee to manage assets intended for the benefit of a third-party (or parties). When a trust is created and administered during the lifetime of the Settlor it is referred to as a “living trust.” A living trust can be revocable or irrevocable, referring to the Settlor’s ability to modify the terms of the trust and/or revoke the trust. A testamentary trust is a trust that is created via provisions in the Settlor’s Last Will and Testament that serve to activate the trust after the Settlor’s death. Because a testamentary trust does not activate until after the death of the Settlor, the Settlor can always modify or revoke the trust while he/she is alive; however, once the trust activates it is effectively irrevocable since the Settlor has passed away.
What Are the Advantages of an Irrevocable Trust?
It sounds counterintuitive to intentionally create a legal arrangement that you can never change or undue. There are, however, reasons why you might want to create an irrevocable trust. The most common advantage gained by establishing an irrevocable trust is asset protection. A trust is a separate legal entity. Once assets are transferred into an irrevocable trust those assets legally become the property of the trust. That means that creditors and other threats to your own personal assets cannot access the assets held in an irrevocable trust because you no longer own or control those assets.
Tax avoidance planning is another advantage of establishing an irrevocable trust. Again, once assets are transferred into the trust they become the property of the trust. Upon your death, those assets are not counted as part of your estate for the purpose of calculating federal gift and estate taxes. Be sure to consult with your estate planning attorney, however, to ensure that the transfer itself does not incur a gift tax. Income generated by the trust is also not counted as your own personal taxable income during your lifetime unless you are a beneficiary of the trust.
An irrevocable trust can also help with Medicaid planning by allowing you to shelter assets in the trust that might otherwise cause you to be ineligible for Medicaid benefits. Like many seniors, you may eventually need to rely on Medicaid to cover the high cost of long-term care, making eligibility for the program crucial.
An irrevocable trust also offers you a way to ensure that assets are protected from a spendthrift or problematic beneficiary. Just as assets held in the trust are out of the reach of your own creditors, they are out of the reach of creditors of the beneficiary.
Finally, placing assets in an irrevocable trust ensures that those assets avoid probate because the assets are not considered part of your estate at the time of your death.
Disadvantages of an Irrevocable Trust
The obvious disadvantage to an irrevocable trust is your inability to modify the trust or revoke the trust once it is established. This means that assets transferred into the trust cannot be controlled by you or moved back out of the trust by you. It also means you cannot add or remove beneficiaries or replace the Trustee down the road. Your inability to make changes to the trust makes it important to work with an experienced estate planning attorney when creating an irrevocable trust.
It is also important to note that while you, the Settlor, cannot make changes to or revoke an irrevocable trust, that does not mean that the trust cannot be modified or revoked by someone else. In fact, you can specifically give the beneficiaries and/or Trustee the authority to modify or revoke the trust within the trust terms. In addition, a court can always modify or revoke the trust if doing so is warranted.
Do You Have Questions about an Irrevocable Trust?
For more information, please join us for an upcoming FREE seminar. If you have additional questions about the advantages and disadvantages of an irrevocable trust, contact an experienced Indianapolis trust attorney at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.
Paul Kraft is Co-Founder and the senior Principal of Frank & Kraft, one of the leading law firms in Indiana in the area of estate planning as well as business and tax planning.
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.
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