Irrevocable Trust

If you own anything of value, you likely want to make sure your loved ones receive it when you die. So you put it in a secure box to protect it, but the box is so secure that you can’t change your mind and take the item out. Then you ask someone you trust to take care of the box. That’s the idea behind an irrevocable trust. But instead of a real box, it’s a legal agreement that defines what happens to the valuable property you put into it.

This article explains irrevocable trusts. There are federal and state laws you must follow when setting up a trust, so you should consider contacting an estate planning attorney in your area. Your attorney will understand the specific laws in your state and help you create a trust that works for you and your loved ones.

What Is a Trust?

A trust is a legal agreement in which you give someone — the trustee — authority to manage your assets for someone else’s benefit.

You essentially transfer ownership of your property to the trust. The trustee then manages the assets according to the terms of the trust agreement and acts in the best interests of the beneficiaries. You can put many types of assets in a trust, like:

• Real estate
• Cash
• Investments
• Life insurance policies

People use trusts for several reasons. Trusts are a popular estate planning strategy. A trust can take the place of a will and still let you direct who gets your assets after you die. Many prefer trusts to a will because they offer more privacy and avoid probate, which can be expensive and take a long time.

People also use trusts for:

• Charitable giving
• Asset protection
• Managing assets for minors or people with special needs
• Tax benefits

We can divide trusts into two broad categories — revocable and irrevocable trusts.

What’s the Difference Between a Revocable and Irrevocable Trust?

The primary difference between revocable and irrevocable trusts is your ability to make changes. You can change or revoke a revocable trust at any time. You can change beneficiaries or take back ownership of trust property.

The government considers you the owner of any property you put in a revocable trust. That means anything you put in the trust is part of your taxable estate.

You don’t have the same flexibility with an irrevocable trust. You can only change these trusts by court order or if all the beneficiaries agree. You also can’t take the property out of the trust. You essentially lose control of the property you put in an irrevocable trust.

But you’re not giving your trustee complete control of your property. You create the terms in the trust document that the trustee legally must follow. The trustee also has a fiduciary duty to act in the best interest of the beneficiaries.

The benefit is that the property in an irrevocable trust isn’t part of your taxable estate. If you are wealthy, that will lower the amount of estate tax due to the government upon your death. This will leave more of your estate to your beneficiaries.

Types of Irrevocable Trusts

There are several types of irrevocable trusts. The one you use depends on your specific goals. These are the most common:

• Irrevocable life insurance trust (ILIT): An ILIT holds your life insurance policy, removing it from your estate and reducing your estate tax.
• Testamentary trust: This type of trust is created when you die. A special needs trust is an example. That type of trust lets you leave an inheritance to a special needs family member. But it preserves their eligibility for government benefits like Medicaid.
• Charitable trust: These trusts are used for charitable giving.
• Asset protection trust: This trust protects trust assets from creditors and lawsuits. A type of asset protection trust is a spendthrift trust, which protects assets and prevents the beneficiary from being irresponsible with their inheritance.

Contact an Estate Planning Lawyer for Help

Irrevocable trusts can be an effective way to protect your assets and lower your estate taxes, but they are complex. If you don’t create the trust correctly, it may not do what you expect. An experienced estate planning attorney can help. They can ensure your trust is correct and will achieve your goals.