Whether revocable or irrevocable, all trusts involve the following participants: (1) the creator, who composes the trust’s wording and transmits property or funds to the trust; (2) the trustee, who adheres to the trust’s directives, invests funds from the trust, use property from the trust to meet the beneficiary’s needs, and pays the trust’s administrative costs; and (3) the beneficiary, who reaps the benefits of the trust’s assets and/or profits.
Revocable Trusts
If you function as all of these participants, you have a revocable trust, which can be changed or rescinded whenever you like. However, revocable trusts offer only partial protection from creditors and only nominal savings on estate taxes. In addition, they are not eligible to receive benefits from government-run programs.
Irrevocable Trusts
By contrast, when you create an irrevocable trust you are composing a text that cannot be easily altered, and the property transferred to the trust is not in your control. So why would an individual choose to give up authority over his or her assets and depend on another person to administer their money? The times when creating an irrevocable trust should be contemplated are when you wish to (1) reduce your estate taxes; (2) become qualified for government-run programs, or (3) safeguard your money against creditors.
The Advantages of Creating an Irrevocable Trust
Reducing Taxes
With an “irrevocable life insurance trust,” individuals who contribute money each year to the trust can use this money to buy life insurance that might circumvent having to pay estate taxes when they pass away. Another variety is a “grantor retained annuity trust,” which gives the creator a set income for a number of years and can permit a portion of the principal to go to a family member’s estate tax-free. In estate tax-savings trusts, only rarely can the trustee and beneficiary be the same person, and in such instances, a neutral third party must serve as a co-trustee who can overrule your instructions.
Becoming Eligible for Government-Run Programs
Disabled beneficiaries who are on Medicaid and Supplemental Security Income (SSI) have strict limits with respect to income and assets, and if they possess or bring in too much money they can lose these government benefits. Irrevocable trusts can protect income and assets so that these limits are not surpassed. Trustees of so-called “Medicaid trusts” cannot be their creators. As is the case with estate-tax savings trusts, beneficiaries lack significant control of the trusts, so the government benefits continue to come in because the trust funds are not included as the beneficiary’s own assets and income.
Protection against Creditors
Creditors are unable to claim assets from an irrevocable trust. The reason for this is that you lack control of the assets and cannot rescind the trust, so you can’t be regarded as the assets’ owner.
If you’re thinking about creating an irrevocable trust, contact Bell & Shaw Law, LLC today to discuss your case. Our experienced team of business attorneys can help you to formulate an irrevocable trust that is ideal for your situation.
