An irrevocable living trust can be a powerful tool to incorporate in your estate plan, offering numerous benefits and protections that are not available through other estate planning strategies. It is important, however, to understand how a trust works and to consider both the advantages and the potential disadvantages of using an irrevocable trust before including one in your estate plan. Toward that end, the Essex Junction attorneys at Unsworth LaPlante, PLLC explain how an irrevocable living trust might fit into your estate plan.
How a Trust Works
A trust is a legal arrangement that allows you, as the Grantor, to transfer assets into the trust, which is then managed by a Trustee for the benefit of the beneficiaries you have named. A trust is a separate legal entity that owns and manages the assets transferred into the trust using the terms and conditions you set forth in the trust agreement.
Trusts are broadly divided into testamentary and living trusts. A testamentary trust is activated after you pass away through a provision within your Last Will and Testament while a living trust activates while you are alive. Trusts can also be revocable or irrevocable. A revocable trust, as the name suggests, can be modified or revoked by the Grantor at any time and for any reason. In contrast, an irrevocable trust cannot be altered or terminated once it is established, except under very limited circumstances, typically requiring court approval.
Revocable vs. Irrevocable Trusts: Whatâs the Difference?
Uses for an Irrevocable Living Trust
Irrevocable living trusts are often used for specific purposes that rely on the transfer of ownership and control of assets to the trust. Some of the most common uses include:
- Asset Protection: One of the primary reasons for creating an irrevocable living trust is to protect your assets from creditors and other threats. Once assets are transferred into an irrevocable trust, they are no longer considered your personal property, meaning they are shielded from creditorsâ claims, lawsuits, and other liabilities that could deplete your estate.
- Medicaid Planning: Medicaid planning is a crucial estate planning component for many people as it provides a way to plan for the high cost of long-term care. An irrevocable living trust is often part of Medicaid planning because it allows you to reduce your countable assets and preserve them for loved ones while also preparing you to qualify for Medicaid benefits. Medicaidâs 60-month look-back period makes planning crucial because you could incur a waiting period where you are not eligible for benefits if the trust is created too close to the time of application.
- Tax Avoidance: If you have a sizable estate, an irrevocable living trust can help reduce your estateâs exposure to federal and/or state gift and estate taxes. By removing assets from your estate, you can lower the value of your taxable estate, potentially saving your estate a significant amount in estate taxes.
- Charitable Giving: An irrevocable trust can be used to facilitate charitable giving through the creation of a charitable remainder trust (CRT) or charitable lead trust (CLT). These trusts allow you to provide for a charity while still generating income for yourself or your heirs, with potential tax benefits.
- Special Needs Planning: If you have a loved one with special needs, an irrevocable living trust can be used to provide for their care without jeopardizing their eligibility for government benefits. A special needs trust can be tailored to meet the specific needs of the beneficiary while preserving their access to vital assistance programs.
Disadvantages of Using an Irrevocable Living Trust
While irrevocable living trusts offer significant benefits, they also come with several disadvantages that must be carefully weighed before deciding to use one in your estate plan. The loss of control over assets is a primary concern for some people. Once you transfer assets into an irrevocable trust, you give up ownership and control over those assets. The Trustee you appoint will manage the trust according to the terms you have set, but you will no longer be able to make changes or withdraw assets from the trust. Likewise, an irrevocable trust cannot be easily changed or revoked which can be problematic if you change your mind about the terms of the trust and/or want to add or remove a beneficiary down the road. Finally, while there are tax benefits to be gained using an irrevocable living trust, you can also create tax liabilities if the trust generates income. Working with an experienced trust attorney is the best way to ensure that you weight the advantages and disadvantages carefully before deciding to create an irrevocable living trust.
Are You Interested in Creating an Irrevocable Living Trust?
For more information, please attend one of our upcoming FREE webinars. If you have additional questions or interested in creating an irrevocable living trust, contact the experienced Essex Junction trust attorneys at Unsworth LaPlante, PLLC by calling 802-879-7133 to schedule your appointment today.
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