Irrevocable Trusts

What Is An Irrevocable Trust?

An irrevocable trust is a trust that can only be terminated with the permission of the beneficiary. Once a grantor puts something in the trust, the grantor can’t take that thing out again without the permission of the beneficiary, and it can only then be used on benefit of the beneficiary. Once something has been moved into an irrevocable trust, the grantor has legally transferred ownership. That potentially subjects the asset to the gift and the gift tax, but in planning for the longer term, it also relieves the grantor of having to pay income tax on that asset.

What Are The Benefits And Limitations To An Irrevocable Trust?

An irrevocable trust offers a few key benefits. First, there are potential gift and estate tax benefits. By transferring an asset during your lifetime, you can take advantage of the gift tax exclusion and structure large gifts into an irrevocable trust over a long period of time. By doing that, you’ve transferred your ownership to the trust which eventually moves that asset away from being subject to estate taxation. That’s often great for high-value assets like insurance policies, real estate, and stock.

Seci, depending on the jurisdiction and the type of issue in play, you may also be able to get some big asset protection benefits from it. An asset properly transferred to an irrevocable trust may not be subject to a collection action or a judgment against the grantor.

Further, an irrevocable trust offers some Medicaid planning advantages. By properly transferring an asset to an irrevocable trust, the asset will not be included as an asset in qualifying for Medicaid, a program commonly used to pay for nursing home care.

Finally, irrevocable trusts can allow people to control their assets from “beyond the grave,” to ensure that their children, grandchildren, further future generations get benefit from the assets in the trust.

What Are The Main Differences Between A Revocable And An Irrevocable Trust?

The managerial aspect is a major point of distinction between a revocable and an irrevocable trust. In a revocable trust, the grantor keeps full control over the asset – they can put things in and take them out as they see fit. For that reason, the asset is still going to be counted for the purpose of estate taxation, asset protection, disability and Medicaid planning. For many people, especially those with assets below the estate tax exclusion ($5.48 million in 2017), this is not a not a big deal and the ability to control that property is the most important thing. For other groups of people, such as particularly high wealth families or those who see a need for Medicaid planning, the irrevocable trust becomes an important, perhaps even a critical, part of long term estate planning.

Why Are Most People Hesitant To Put Their Assets In An Irrevocable Trust?

For a lot of people, the hesitance is typically going to be down to the loss of control. Once you put an asset in an irrevocable trust, you’re going to give up full ownership of the property. In many situations, the grantor can maintain lifetime benefit from it, but they will not have the same degree of control. Once in the trust, the trustee will have some, if not complete, discretion to make decisions about trust assets, and the trust beneficiary will have rights in relation to the assets. People are afraid of losing control, and it can cause some understandable concern.

It is important to remember that assets are placed in irrevocable trusts for long-term planning, as part of a comprehensive estate planning and asset protection plan. It helps to ensure that no matter what happens, the people and groups you are about will be able to benefit from your assets.

Can Someone Have Both Revocable And Irrevocable Trusts?

Yes. For many people, the revocable trust will be sufficient if their assets aren’t subject to estate taxation. If there’s not a burning need to either avoid either estate tax or maintain eligibility for something like Medicaid, a revocable trust is perfectly fine. On the other hand, for situations like insurance planning, Medicaid planning, asset protection, planning for large wealth inheritance between multiple generations, then irrevocable trusts come into the picture as an important planning tool. Families in those kinds of circumstances should definitely consider placing some assets in a revocable trust and some assets in an irrevocable trust. Those are the kinds of decisions to make based on the specific asset, the nature of control needed over the asset and what kind of planning is going to be happening to the asset in the short-term, medium-term and long-term.

Are Certain Assets Better Suited For Irrevocable Trusts?

Yes. There are a couple of classic examples. One are long-term gifts to children. If people are trying to build up a reserve of cash for their kids or their spouse that won’t be subject to gift and estate taxation as far as the ultimate calculation of that tax at ones death, an irrevocable trust is a really useful tool to set money aside for them. It won’t be taxable as part of the estate, and takes advantage of gift tax exclusion. Another classic asset that is great to put in an irrevocable trust is an insurance policy. Any insurance policy that the actual person controls is potentially subject to estate taxation. However, if you take that policy and transfer it into an irrevocable trust, then the death benefit is eventually removed from the estate tax calculation of the person’s estate.

You can still pay the insurance premiums to the insurance policy while it’s in the trust and then the death benefits stays inside the trust. So, depending on the policy, that can be maybe a million more dollars that will eventually go to their beneficiaries but doesn’t count towards the estate tax.

How Do You Determine Which Type Of Trust Is Best Suited For A Particular Client?

I look at what their assets are. We see how they are defined, whether they are in securities, real estate, a family company, and so on. We want to determine whether those are assets that can be easily shifted. It’s important to identify assets that have defined beneficiaries, which assets are counted towards the estate tax, and which aren’t. Another thing I look at is what their family looks like and what the family dynamics may be. We work to decide how people want to structure their legacy, and we also look at how people may want to make gifts during and after their lifetime.

If people have charities or non-profits such as churches that they support during their lifetime, then we can structure a variant of the irrevocable trust that benefits them and also manages their ultimate tax burden. We look at what they have, who is in their family, and who they value in their lives, and also what their values are. We use those as our guiding metrics to set up an estate plan or set up a trust plan that will optimally direct money to the right people over the right period of time and keep their taxes as low as we can get them.

How Does An Irrevocable Trust Help In Medicaid Planning?

For clients who are concerned about long-term healthcare planning, understanding Medicaid and Medicare is important. Medicaid is the program that ultimately pays for a lot of people’s long-term care, in particular nursing home care. Since Medicare does not pay for nursing home beyond a 30-day period, Medicaid is the one that steps in to do that payment. To be eligible for Medicaid, a person has to have drawn down their assets below a certain level. One way of drawing down your assets is to transfer them to a trust.

This draw down – the trust transfer – has to happen at least 5 years before the need for Medicaid arises. This calls for a long-term planning strategy, both to ensure financial Medicaid eligibility by minimizing on-paper assets, and to protect their legacy by ensuring that the trust assets can still work for the person’s desired beneficiary.

What Should Someone Look At When Deciding On A Trustee For An Irrevocable Trust?

This depends on the nature of the trust, especially if there are high value assets and management expertise is of high importance. When looking for a trustee, we’re going to look for people with asset management skills. It at this the point where we often recommend people look at having a professional trustee which can typically going to be found within either banks’ wealth departments or with a company that specializes in trust management. Another thing you look at is the dynamics and the relationships between the family members. If someone has a lot of kids, a spouse or a second or a third spouse particularly in multiple marriages, we want to make sure that any family member we choose as a trustee will be able to do that job without a conflict.

We generally recommend people use a professional trustee. The idea is that we want to minimize conflict in the trustee position and emphasize competency and good management.

Can Irrevocable Trusts Ever Be Amended Or Modified?

It depends. We treat the trust as a done deal. Having said that, there are certain situations where an irrevocable trust can be amended, but it’s state-specific, and it often requires literally every party in the trust to be on the same page. This is highly dependent on the specific wording of the trust documents, but there is often language that allowed the beneficiaries to collectively make an amendment to the trust – particularly if they are all lifetime beneficiaries. But as a general rule, don’t plan on it.

How Much Can Someone Transfer Into An Irrevocable Trust Without Reaching The Gift Tax Limit?

Every year, a person has a gift tax exclusion per gift per person. That limit varies on an annual level. For 2017, let’s say the exclusion is $14,000 per gift, so every year you can give $14,000 to each person without a gift tax issue. What that means for a trust is that if I have a trust designed for a child, and maybe I have three kids and I gift $14,000 every year to each kid, every year you can collectively build up that gift. With good investment, you can really grow the total sum but the idea is for gifts to take advantage of the annual exclusion. There is also a lifetime exclusion for both the gift and estate tax, which in 2017 is $5.49 million. Married individuals can effectively double that to just shy of $11 million.

That’s actually 10.98 million for a married couple. So if you’re going to make a big shot at the estate tax, that’s the asset limit. Everything below 10.98 million dollars is not taxed, and that’s the same for the gift tax exclusion – below that, for a married couple, is not taxed.

Can Someone Make Additions To An Irrevocable Trust Over The Years?

Of course. Contributions to an irrevocable trust are not limited. In virtually every trust, you can make a gift to it as often as you’d like. For example, with the annual gift exclusion, the grantor can contribute that $14,000 every year from the birth of that child until the day that child comes of age or that parent dies or decides to stop contributing. It’s applied to both parents individually so that families can put in $28,000 in gifts every year as long as they’d like. They can gift as much and as long as they like.

How Does Someone Initiate The Process Of Setting Up An Irrevocable Trust?

Many people might think it’s a simple thing to set up. It is actually very important to talk with somebody who can give you good advice. I want to talk with people about what their assets are. So, typically, a financial statement is really helpful for us as far as understanding what people are working with. Beyond just the financial statement, we have a long talk with them about their values, their goals, what they are afraid of as far as taxes, any personal issues, what kind of big gifts they want to make to people, and what kind of things they want to support. The ultimate goal here is to make sure that the person setting up the trust is protected financially for their lifetime and that the people and organizations they care about are supported even when they are no longer there to do that support in person.

Additional Information About Irrevocable Trusts In Georgia

The term irrevocable trust is a broad term that covers any trust whose language cannot be changed by the grantor and where the grantor cannot undo transfers to the trust. There are many different types of irrevocable trusts, which are tailored to the needs of the client. When someone comes to our office to discuss their estate planning strategy, we can design the trust to accomplish their goals.

For more information on Modifying An Irrevocable Trust, a free initial consultation is your next best step. Get the information and legal answers you are seeking by calling (404) 939-7562 today.