The many benefits of an irrevocable trust
Many of my clients ask me about the benefits of using a trust as part of their estate plan, but they don’t know that there are many different types of trusts and each can serve an important purpose as part of their estate plan, depending on your ultimate goals and concerns are.
For example, a special needs trust allows your beneficiary to receive a stipend of money or financial assistance of some kind from the trustee without affecting or denying any financial assistance received from the government due to a disability or disorder. Of all the many categories of trust, the two most basic are revocable and irrevocable.
Every trust, regardless of its purpose, will be labeled revocable or irrevocable. An irrevocable trust serves the dual purpose of protecting assets and reducing estate taxes. Assets in an irrevocable trust are protected because the grantor no longer owns them in the eyes of the law.
When an irrevocable trust is created, a new entity is formed with its own federal tax identification number. It is not an extension of its creator. Instead, it is your own unit that can accept, manage, and distribute assets through the designated trustee and solely by the wording of the initial trust language. Once the irrevocable trust is created and funded, it can no longer be modified or revoked. The only parties with access to the trust assets are the trustee and the beneficiaries.
The grantor is not permitted to be the trustee or beneficiary. However, the trustee may be the same party as the beneficiary, and in fact this is often the most ideal situation. Once the assets are in the irrevocable trust, they are now protected from creditors, litigants, and the grantor’s spouse.
The assets are also protected from creditors, litigants and spouses of any trustees or beneficiaries, as long as the assets remain in the trust. Since the irrevocable trust has no creditors of its own, the assets will remain out of the reach of any financial vulture looking to acquire them.
Additionally, by removing these assets from your individual name and assigning them to the newly formed irrevocable trust, you have reduced your estate tax bracket by the same amount. When you die, the federal government will add up the value of all the assets you owned in your individual name and assess your estate with a tax based on that value.
This estate tax will take into account real estate, bank accounts, brokerage accounts, collectibles, cars, jewelry, paintings, and even life insurance policies. By moving your assets from your individual name to the name of your newly created irrevocable trust, you will remove those assets from your estate even if you retain access to and enjoyment of them throughout life.
