Pros and Cons of Irrevocable Trusts
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A trust fund is a legal document set up and funded by a grantor to help a beneficiary. It is administered by a trustee. At Phelps LaClair, serving Chandler, Mesa, Phoenix and Scottsdale, we have helped thousands of people create revocable and Irrevocable trusts. Most people with an estate plan know the basic advantages of a revocable trust. But when it comes to the nuts and bolts of an irrevocable trust, many don’t understand the pros and cons until we go over a few of the advantages and disadvantages. It’s important to thoroughly understand what an irrevocable trust can and cannot do before you decide to create one. Here are some of the essential pros and cons of an irrevocable trust.
Irrevocable Trust Basics
There are two types of irrevocable trusts: those created during the grantor’s lifetime and those created upon one’s death (testamentary trusts). The common element between the two types is that the terms of an irrevocable trust cannot be changed.
Testamentary trusts are created and funded upon the death of the grantor according to terms in the grantor’s will. They are logically irrevocable because the one who created the trust is deceased; therefore, the terms of the trust cannot be changed. In the same way, a revocable trust automatically becomes an irrevocable trust when the grantor dies. This is because the one who created the trust is no longer able to change it.
Pros of an Irrevocable Trust
With an irrevocable trust, the assets used to fund the trust now belong to the trust instead of the grantor. This has several advantages:
- Protection of assets—All assets placed in an irrevocable trust are safeguarded from lawsuits by creditors, a divorcing spouse, business partners, or anyone else seeking a legal judgement against you. If your home, art collection, jewelry, and other valuables are placed in this trust, they are beyond the reach of unscrupulous litigation.
- Tax planning—The assets placed in an irrevocable trust are generally not counted toward the value of your estate. If you have a large estate, you may be able to reduce the tax liability of the estate by placing assets into this trust.
- Medicare—An irrevocable trust can be a huge benefit to avoid the depletion of your hard earned wealth. When you transfer valuable assets into an irrevocable trust, it reduces your financial profile. That may enable you to take advantage of Medicare and other government benefit programs.
- Irresponsible heirs—You can create a trust that becomes an irrevocable trust that distributes assets from the trust on a conditional basis. If you have children who struggle with addiction, for instance, this is one way to reduce their chances of relapse. You can preserve the assets in the irrevocable trust from coming into the control of heirs you do not trust to use the inheritance wisely.
Cons of an Irrevocable Trust
There are two main drawbacks to an irrevocable trust. The terms cannot be changed. If an unforeseen situation arises in the future where you need to access some of the assets in the trust, you will be bound by the terms of the trust. The other biggest con is that if you place a large sum of money in the trust for someone and later change your mind, you will not be able to change the trust.
Given the advantages and drawbacks of an irrevocable trust, the best thing you can do is make absolutely certain that you want the assets placed in the trust to go to the beneficiaries you have named in the manner you have determined. It is seldom enough to create an irrevocable trust just on the basis of tax advantages or assets protection. It is like the career you choose: do it because you love it, for it will be your life from now on.
Trust is earned. Phelps LaClair has been in business for forty years over two generations. We can help you with all aspects of estate planning. To understand more of the pros and cons of an irrevocable trust, give us a call for a free consultation. When you trust us with your estate plan, you trust us with your future.