Learning About Trusts - Irrevocable Trusts and Why You Would Use One
By Don Drake, Connelly Law Offices, Ltd.
"In our last post, we discussed the Spendthrift Trust. In this blog edition, we will look at irrevocable trusts," said professional fiduciary and certified elder law Attorney RJ Connelly III. "An irrevocable trust is a legal arrangement in which the grantor transfers assets to a trustee responsible for managing and distributing them to the designated beneficiaries. The purpose of creating an irrevocable trust is to protect assets from creditors, reduce estate taxes, and ensure that the beneficiaries receive the assets according to the grantor's wishes."
"The most important aspect of irrevocable trusts," Attorney Connelly continued, "is that they cannot be changed or dissolved once established, except under very specific circumstances. The grantor gives up ownership and control over the assets, which means they cannot make any changes or revoke the trust without the beneficiaries' consent or a court order."
The trustee plays a crucial role in managing the trust and ensuring that the assets are distributed according to the grantor's instructions. Typically, the trustee is a third-party member, such as a professional fiduciary, with expertise in managing trusts. The trustee is responsible for investing the assets, distributing income and principal to the beneficiaries, and complying with all legal requirements.
Benefits of an Irrevocable Trust
When an individual creates an irrevocable trust, any assets transferred into the trust no longer belong to them. As a result, these assets are no longer considered part of the grantor's taxable estate. This can be particularly beneficial for individuals with a large estate since it significantly decreases their tax liability.
"Besides the tax benefits, irrevocable trusts offer privacy and can avoid probate," said Attorney Connelly. "Probate is a legal process that typically occurs after an individual's death, during which their assets are distributed according to their will. This process can be lengthy and costly and may not consistently distribute the assets as the grantor intended. By creating an irrevocable trust, the grantor can ensure that their assets are distributed according to their wishes without the need for probate. Plus, irrevocable trusts are private, meaning that the terms of the trust and its assets are not available to the public. This can be particularly important for individuals who wish to keep their financial affairs private."
Types of Irrevocable Trusts
Various kinds of irrevocable trusts can be established to suit specific situations, such as a charitable trust, a life insurance trust, or a generation-skipping trust. Each type of trust has unique features and benefits, so it's essential to work with a qualified professional fiduciary or attorney to help you determine which is right for you. Let's review these trusts.
Charitable trusts are a way to transfer assets or funds to a charity. There are two types: charitable remainder trust and charitable lead trust. With the former, the grantor transfers assets to a beneficiary and then disperses the remainder to a charity. With the latter, the grantor transfers assets to a charity, and the remainder goes to a final beneficiary.
Irrevocable life Insurance Trusts (ILIT)
An irrevocable life insurance trust (ILIT) is a trust created by an insured individual to hold and manage a life insurance policy. This helps to minimize estate taxes and ensures that the policy proceeds are distributed according to the insured's wishes.
GRATs and QPRTs
GRATs (grantor-retained annuity trusts) and QPRTs (qualified personal residence trusts) are trusts that can help minimize taxes on gifts to beneficiaries. They allow the grantor to place money and property in them for a set time, after which the trust terminates. If the grantor is still alive when the trust terms end, the money and property are passed on to the beneficiaries without incurring any estate taxes. It's advisable to consult with a professional fiduciary or tax professional to determine if this strategy is appropriate for your situation.
We discussed this type of trust in our previous blog post. Spendthrift trusts limit the beneficiary's access to the trust's assets and can be helpful for those who have a history of overspending or lack money management skills. The trust is managed by a trustee who controls the distribution of funds to the beneficiary to prevent misuse. Spendthrift trusts promote responsible financial behavior and protect against financial mismanagement.
Special Needs Trusts
Special needs trusts provide financial support to individuals with disabilities without affecting their eligibility for government benefits. By placing assets into a special needs trust, the beneficiary can receive support for expenses like medical care, housing, etc. The trustee of the trust manages the assets and makes necessary distributions to the beneficiary. It's a crucial tool for families and individuals who want to ensure that their loved ones with disabilities are taken care of.
When the Grantor Passes
"When a grantor passes away, the assets are usually distributed to beneficiaries per the trust's terms, and in most cases, the trust dissolves automatically once the assets have been fully distributed," said Attorney Connelly. "However, there is one notable exception to this rule for retirement accounts that are set up to pass to a beneficiary through a trust. Under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, some non-spousal beneficiaries must take all their distributions within ten years after the year of the grantor's death. This is a notable change from the previous norm, allowing beneficiaries to take distributions throughout their lives. It is also important to note that this change applies only to specific beneficiaries, so it's best to consult a professional fiduciary or an estate planning professional to understand how this rule may affect your specific situation."
A Final Word
"Irrevocable trusts are legal tools that protect assets from taxes, creditors, and probate," stated Attorney Connelly. "Changes to an irrevocable trust can be made through a legal process called "decanting," a court order, or state laws that permit certain modifications. Not all changes are allowed, and it's important to consult with an experienced attorney to determine what changes, if any, can be made."
Please note that the information provided in this blog is not intended and should not be construed as legal, financial, or medical advice. The content, materials, and information presented in this blog are solely for general informational purposes and may not be the most up-to-date information available regarding legal, financial, or medical matters. This blog may also contain links to other third-party websites that are included for the convenience of the reader or user. Please note that Connelly Law Offices, Ltd. does not necessarily recommend or endorse the contents of such third-party sites. If you have any particular legal matters, financial concerns, or medical issues, we strongly advise that you consult your attorney, professional fiduciary advisor, or medical provider for advice.