Implementing an irrevocable trust is a big undertaking. A grantor puts what are often quite substantial assets into the hands of their beneficiary (or beneficiaries).
The issue being examined today is whether such trusts are a good idea to begin. Like in many matters of law and asset management, the answer isn’t clear cut. Join us today as we break down the nuances of irrevocable trusts, why they can be risky, and where their benefits lay.
The Basics of an Irrevocable Trust
In a trust, a trustor (also called a grantor) gives another party, the trustee, control over some amount of property or assets. This party holds and uses those assets for the benefit of another party (or group of parties) known as the beneficiaries.
This all holds true for an irrevocable trust. However, an irrevocable trust also has specific properties that make it far more difficult to alter once it is put in place.
As its name implies, an irrevocable trust is more or less irrevocable. The terms of the trust cannot be modified, amended, or terminated without permission from the trust’s beneficiaries.
The Benefits of an Irrevocable Trust
While their ironclad nature can be offputting, it can also be a strength. Irrevocable trusts carry some significant benefits if properly implemented.
The property transferred to an irrevocable living trust does not count towards the gross value of an estate. This allows one to protect assets from estate taxation while ensuring the assets are still used in a way the trustor deems appropriate.
In fact, irrevocable trusts can be used to deplete one’s property for a variety of other reasons too, without that property leaving trusted hands. This can help with Social Security income, Medicaid, and more.
A well-written irrevocable trust is also resistant to abuse, as the trustor cannot alter its terms once implemented. Beneficiaries must follow whatever conditions are set for distribution. No amount of pressure on the trustor, or any sort of mental decline or change of heart on their part, will change its terms.
An irrevocable trust can also be made quite flexible if the trustor so desires. Provisions can be put in place so that trust management and the distribution of assets is not as restrictive as one might first imagine. Even if the terms themselves cannot change, the terms put in place do not need to be themselves restrictive.
In summary, irrevocable trusts carry many tax shelter benefits and the fact they are difficult to modify may even be a desirable property, depending on what the trustor is looking for. At the same time, this does not mean irrevocable trusts are without their downsides.
The Downsides of an Irrevocable Trust
As was mentioned, irrevocable trusts are difficult to modify. Once put in place, a trustor cannot reasonably expect the terms to be changed without immense difficulty. In many cases, changing the trust may just be impossible without the full cooperation of its beneficiaries.
The terms of an irrevocable trust should be precise and well-thought-out. A trustor will be well and truly relinquishing control of the associated property/assets. A misstep or change of heart could leave those assets being used for a purpose the trustor finds disagreeable with no legal recourse.
The complexity of irrevocable trusts also tends to make them difficult for middle-income Americans to make use of. They can be expensive to have written up and require significant amounts of assets and property for most people to justify.
Getting the Trust You Want
An irrevocable trust should never be written up without the help of an attorney. The language and nature of trusts require expertise the average person does not have. Even minor errors may cause a cascade of problems with the associated assets if the document is even still valid at all.
An estate planning attorney can ensure your irrevocable trust operates the way you intend. They also have the expertise to help you explore your options and will be able to offer alternatives that may better fit your desired outcomes.
Your attorney can explain all the pitfalls of an irrevocable trust and makes sure the decision you make is informed. It will be their duty to help you choose the best option available to you and to lay out the terms so as to most benefit the parties you wish your trust to help.
Your estate planning attorney will also be able to explain the often complex nature of tax shelter benefits. If you’re locking your property and assets down to avoid being taxed or to qualify for particular benefits, you will want to make sure your trust guarantees that. This is another place where an attorney can once again help you avoid pitfalls and point out common errors people in your place might make.
Irrevocable Trusts Bear Considering
Finally, the inciting question is reached: Is an irrevocable trust a good idea?
If you’re wealthy, it’s an option that bears considering. They can allow you to keep assets among trusted parties, avoid estate taxes, and more. Their ironclad nature also means issues like family strife will have a hard time impacting your assets.
The equation is different for those who consider themselves middle or lower class. That said, irrevocable trusts can help protect assets from lawsuits, which still has value. At the same time, the cost and complexity of these trusts mean many middle- and low-income people won’t find much benefit in this sort of trust.
For those unsure, consult an attorney! You’ll need one for the process regardless and they can advise you on whether an irrevocable trust is a good option for you. It will be both their ethical and legal duty to advise you, to the best of their ability, on what they believe will work best for your needs.