Thinking about the end of our lives can be difficult, but it’s an important part of getting older. Too many put it off, however, and risk not passing on their hard earn assets to their desired heirs.
57 percent of adults in the United States have no estate planning documents like a living trust or will. That leaves the assets open to the government after they die or subject to high estate taxes.
An irrevocable trust is a great way to secure your assets for your heirs and easy to take care of with the right help. Learn all about irrevocable trusts, how they work, and their advantages below.
What Is an Irrevocable Trust?
Rather than putting assets into a will during estate planning, sometimes it’s a smarter idea to put them into a trust. A trust is a legal financial entity. A grantor creates a trust with certain rules as to how the property or belongings in the trust get distributed upon the grantor’s death.
A grantor can remove assets and property from their estate by placing them in a trust. They give up ownership of the assets by transferring them to the trust. The assets in the trust will not incur estate taxes when passing onto the designated beneficiary.
A trust can either be revocable or irrevocable. A revocable trust remains open to changes after finalizing the terms. The grantor also continues to earn money from the property in the trust.
An irrevocable trust, in contrast, does not allow anyone to make changes to the terms of the trust after finalizing except the named beneficiary or beneficiaries.
How Does An Irrevocable Trust Work?
Creating an irrevocable trust requires three key people: a grantor, a beneficiary or beneficiaries, and a trustee.
The grantor owns the property or assets and establishes the trust. The beneficiary or beneficiaries gain access to the trust after a designated period or the grantor’s death. The trustee refers to the organization or person administering the trust per the trust agreement.
There are two types of irrevocable trusts and how they work depends on the type of trust formed.
A Living Trust
A living trust refers to when a grantor establishes an irrevocable trust while still alive. This may be a grantor annuity trust, irrevocable life insurance trust, or a charitable remainder/charitable lead trust.
Grantor Annuity Trust (GRAT)
A GRAT permits the grantor to continue adding assets to the irrevocable trust for a set time. It also allows them to receive an annuity payment during that same timeframe. Once the period ends, the assets automatically go to the trust beneficiaries without any taxes.
Irrevocable Life Insurance Trust (ILIT)
An ILIT gets funding from one or more of the grantor’s life insurance policies. The grantor passes on the ownership of the policies to the trust. This means if the beneficiaries die before the grantor, the funds could potentially return to the grantor’s estate and become subject to an estate tax.
Charitable Remainder/Charitable Lead Trusts
Both of these irrevocable trusts name a charity as the beneficiary. A charitable remainder trust permits the grantor set payments from the trust throughout their lifetime. Once the grantor dies, the named charity receives the remaining funds.
A charitable lead trust does not permit payments to the grantor, but the charity for a set time. Once the time passes, the remaining funds go to the named beneficiary of the trust, usually an heir.
A Testamentary Trust
A testamentary trust refers to when a trust is funded after the grantor’s death. The grantor explains in their will that they want the trust created. Upon their death, the proceeds of the grantor’s estate fund the trust.
A testamentary trust is irrevocable because only changing the will before the grantor’s death can modify the terms of the trust.
Five Irrevocable Trust Advantages
Although a revocable trust allows the grantor to access the money throughout their lifetime, there are still big advantages to putting assets in an irrevocable trust. Here are 5 that you should know for estate planning purposes.
1. Avoid Estate Tax During Probate
Tax reforms in 2017 and 2020 made big changes to estate tax laws so moderately wealthy people no longer need to worry as much about estate taxes. However, those extremely wealthy people who may reach above the threshold will still find this a big advantage.
Estate taxes can take up to 40 percent of your estate, so it pays to put your assets in an irrevocable trust.
2. Protect Assets If You’re In A Profession Vulnerable to Lawsuits
Lawyers, doctors, and other professionals vulnerable to lawsuits can shield the assets they hope to pass on by placing them in a trust. This way, if they do need to pay out after a lawsuit, those important assets remain untouchable.
3. Avoid Creditors
Placing assets in a trust provides legal protection from creditors. The strength of this protection varies by state.
For example, some states prevent creditors from accessing the assets if the grantor files for bankruptcy. Others also prevent clawback of the grantor’s assets by creditors. It all depends on the state laws.
4. Special Needs Trust
A special needs trust is an irrevocable trust used to designate funds for the care of a beneficiary with disabilities.
Placing assets in a special needs trust can also help them meet the income level required for federal assistance programs like Social Security Disability and more.
These cases are especially complicated so it’s important to hire a special needs trust attorney with experience.
5. Qualify For Medicaid
Placing assets in a trust can also help the grantor qualify for federal assistance programs like Medicaid.
The grantor gives up all ownership of the assets, so they do not count towards the income requirement. This allows the grantor to still pass on their assets to their heirs while still getting their medical needs met.
Hire An Estate Planning Attorney You Can Trust With Your Irrevocable Trust
Estate planning is vital to ensuring all the assets you’ve accumulated throughout your life pass on to your heirs or desired beneficiaries. Learning about the different options like revocable and irrevocable trusts can help you make the right decision so you pass on as much as you can.
If you try to plan it all alone, you may miss out on better legal options. That’s why it’s crucial to hire an estate-planning attorney with experience.
You can trust the estate planning experts Smith Barid, LLC to guide you towards your best options and protect your family’s future. Contact Smith Barid in Savannah, Georgia for an estate planning consultation today!