An irrevocable trust allows a person to transfer assets to beneficiaries without wasting time and money going through probate. Yet, all decisions are permanent and can't be changed at will. The following guide explains more about this kind of trust and whether it may be right for you.
You create an irrevocable trust similarly to any other trust. You name the trustee, beneficiaries, and the terms of when and how the property is distributed. The difference between a revocable trust and an irrevocable trust is that when you create an irrevocable trust, you give up the ability to make changes to the trust as its creator. If you're trying to get assets out of your name for Medicaid or tax purposes, you will not be able to be the beneficiary or trustee.
Once the trust is set up, the property you choose is transferred to the trustees. At this point, they're no longer your assets and belong to the trust. Once transferred, the trustee administers the property based on the directions you gave. If you want the trust to hold assets until your death, then distribute them to family members, you can spell that out when you create the trust (though there may be estate tax consequences for this specific example).
Due to their unchangeable nature, irrevocable trusts are usually task-specific. Usually, an irrevocable trust is called for when there is a specific need, and having the ability to change the terms of the trust is not desired, or has negative consequences (e.g., increased estate tax liability).
If a revocable trust is like clay, an irrevocable trust is like cement. Irrevocable trusts are quite flexible in their creation, but once set, are generally unchangeable.
If you have a specific purpose in mind for a trust, and having the ability to change the terms later is a bad result, an irrevocable trust is probably the correct tool for the job.
Irrevocable trusts should be used when the occasion calls for them. An estate planning or elder law attorney should advise you as to when an irrevocable trust is the proper tool for the job. Common examples of an irrevocable trust are an irrevocable life insurance trust (an "ILIT"), a Medicaid trust, or an investment services trust
An ILIT holds a life insurance policy outside the assets owned by its creator. This is most commonly used in estate tax planning to create a source of funds outside the taxable estate. These funds are then used at death to purchase assets from the estate to pay off any estate taxes due. If your estate is likely to not face an estate tax liability, this is likely not a tool to use in your estate plan.
A Medicaid trust is a trust designed to get assets out of an older person's name for purposes of qualifying for Medicaid. This technique usually requires significant pre-planning, but when properly executed, can preserve considerable assets. The trust gets the assets out of the creator's name for purposes of meeting Medicaid's eligibility requirements but requires waiting a number of years to prevent incurring a Medicaid penalty.
An investment services trust is a Tennessee-specific trust designed under Tennessee statutes to allow the creator of the trust to place some assets out of reach of the creator's creditors. Numerous legal commentators across the country have questioned and opined on the effectiveness of these self-settled asset protections trusts (often called Alaska or Nevada trusts after the first two states to pioneer this idea), but it is another example of a trust that needs to be irrevocable to get the job done.
If you want to explore whether you need an irrevocable trust, contactTrailhead Estate Planning. This local practice provides reliable guidance for families throughout Hamilton County, TN. Their team will be happy to offer assistance and answer any questions throughout every step of the estate planning process. Visit them online to learn more about their services, and call (423) 228-7029 to book a consultation.
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