Who Needs an Irrevocable Trust?
You may have heard of the benefits of having a trust in your estate plan. It's true that trusts provide many advantages, including the avoidance of probate. But beyond that, the types of advantages offered by a trust depend on the type of trust you use. For instance, revocable and irrevocable trusts provide different benefits. Further, there are different types of irrevocable trusts. The person who needs an irrevocable trust generally will have very specific goals in mind. It is extremely important that you understand the significant differences before ever signing an irrevocable trust.
As the name suggests, a revocable trust is one that the grantor (also called the settlor or trustmaker) can revoke at will. If you've heard someone talk about a "living trust," it was probably revocable. A revocable living trust allows the grantor serve as trustee and to use and benefit from trust assets during their lifetime. After their death, a successor trustee named in the trust document manages and distributes trust assets as the grantor dictated in the document. This type of trust avoids probate, gives the grantor maximum flexibility during life, and allows them to maintain a level of control over the assets even after death. In addition, the grantor can revoke the trust at any time before death or incapacity. Given this level of control, why would anyone want a trust they couldn't revoke?
Tax Advantages of Irrevocable Trusts
Technically, irrevocable trusts are living trusts, too, since they are created during the life of the grantor (as opposed to being created in a last will and testament). However, they are less common than revocable living trusts, because they offer less flexibility. As the name implies, an irrevocable trust cannot be revoked at will by the grantor. Depending on how the irrevocable trust is designed, once assets are placed in the trust, they might be considered to no longer belong to the grantor. By contrast, because a revocable trust can be revoked at any time, its assets remain in the grantor's control.
What the grantor loses in terms of control with an irrevocable trust, however, they may make up for in other ways. For instance, if designed to be a completed gift irrevocable trust, one of its benefits can be the avoidance of death or estate taxes. If you are the grantor of a completed gift irrevocable trust and you have assets in excess of the federal gift and estate tax exemption (in 2017, $5.49 million for an individual, double that for a couple), placing assets in a completed gift irrevocable trust removes them from your taxable estate. This type of trust is particularly useful for large life insurance policies.
For the vast majority of us for whom paying federal estate tax is NOT a concern, irrevocable trusts can still be worthwhile.
Asset Protection and Other Benefits of Irrevocable Trusts
Think of an irrevocable trust as a very high shelf. If something is placed where you can't get it, it's also out of reach of someone who is trying to get it from you. Irrevocable trusts can also be designed to protect assets in a number of situations, including from creditors.
However, there's a catch: you can't place assets in an irrevocable asset protection trust to protect assets from an existing or emerging creditor or lawsuit. If you place assets in an irrevocable trust as legal or credit issues are looming, the transfer could be viewed as a fraudulent conveyance.
Under some circumstances, placing assets in an irrevocable trust can protect them from being reached in a divorce. This might come into play in a second marriage when one party has adult children: he or she could create a trust and place assets owned before the marriage, and ultimately intended for the children in the trust. This would keep the assets separate and prevent them from being commingled with marital assets, which could make them subject to division on divorce.
Irrevocable trusts can also be designed to protect assets from needing to be "spent down" to qualify for Medicaid in the event you ever need long-term care. Because the assets are no longer available for your benefit, they are not "countable" for Medicaid purposes.
And, like revocable trusts, irrevocable trusts have the advantage of keeping assets out of probate and allowing the grantor, through the trust document, to exercise control over the management and distribution of assets.
In any case, irrevocable trusts can offer significant benefits, but also have downsides. Whether the restrictions of an irrevocable trust outweigh its advantages depends on the specifics of your situation. If you are considering an irrevocable trust, you should discuss it with an experienced Ohio estate planning and probate attorney who can help you evaluate if an irrevocable trust is the right option for your needs.