Deciding whether an irrevocable trust is right for you will depend largely on your situation and planning goals. There are other options, in addition to the irrevocable trust, to help in estate planning like a revocable trust and living trust.
But there may be good reasons to consider an irrevocable trust like becoming eligible for Medicaid, protecting your assets, or reducing taxes. So, it’s important to understand what you are trying to achieve and to speak to an attorney to fully understand your best options.
What is an irrevocable trust?
The word “irrevocable” means that something is final or can’t be reversed or changed. So, by creating an irrevocable trust, you will have a trust that is difficult if not impossible to change. For this reason, this type of planning tool may not be the right choice if you don’t want to lose control of your money and assets.
In spite of this lack of flexibility, there are a few incidences when an irrevocable trust would make sense. For example, it is sometimes used as a planning tool for long-term care. This trust, which you (the Grantor) create, will hold assets like your house and investments that can help you become eligible for government benefits. But although there are a few times that this type of trust can be beneficial, you should be aware of its drawbacks.
Disadvantages of an Irrevocable Trust
The irrevocable trust should be implemented in very few cases and is definitely not a solution for everyone. Here are some of the reasons this type of trust should be avoided unless you are someone who plans to receive Medicaid, seeking to minimize taxes, or looking to protect your home and assets from creditors.
- Although you are the person who creates the trust, you will not be able to make changes. Only your named beneficiary (the person who will take control of your income and assets) can make changes once the trust has been created. You should check with your attorney if and when you may be able to retain limited control and take actions such as modifying the trust.
- By creating such a trust, you are giving control to the beneficiary of your income and assets to someone else. This could be a detriment to your plans should your situation change, or problems arise between you and the beneficiary.
- When seeking to protect assets through an irrevocable trust, you should be aware that your assets can be reclaimed by a court if it finds you transferred them to avoid a lawsuit or other “unjust” reason.
- With irrevocable trusts, you can expect that expenses may incur as many of these trusts are treated separately when it comes to income taxes.
When to consider an Irrevocable Trust
All things considered, there are times when you may benefit from an irrevocable trust due to your circumstances:
- Government Program Eligibility – You plan to receive government benefits, like Medicaid, which require you to meet certain income and asset limits.
By giving control of these resources to the beneficiary in the trust, they are not included in order to receive benefits. It’s important, however, to know and understand your options before putting the majority of your assets into this type of trust. There are other ways that you may be able to qualify for Medicaid. Joining a Pooled Trust may help you to become eligible without the need for an irrevocable trust. - Reduce Tax Liability – You are looking to minimize your taxes.
Such trusts also help with estate taxes. Since your property and assets are transferred to your beneficiary’s control, they are generally overlooked when tax time comes around. In addition, wealthy individuals who gift money on a yearly basis can benefit from the charitable tax benefit to reduce taxes. - Protect Assets from Creditors – You are seeking protection of your income and assets.
There are times when your income and property can be subject to collection by creditors. Examples can include a lawsuit against you or a loan default. Note: creditor protection varies from state-to-state.
Getting Help
Because of the inflexible nature of an irrevocable trust, it’s always recommended that you seek an attorney to fully understand what’s involved and how you will be affected. There are other options that may achieve your goals without having to give up control of your property and resources.
If you are looking to join a Pooled Trust in order to qualify for Medicaid benefits, take advantage of a free KTS Pooled Trust consultation.
