Advantages & Disadvantages of an Irrevocable Trust
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When you’re looking to protect your assets for future generations, calling on the expertise of an estate planning lawyer is a smart idea. At Phelps Law Firm we’ve been helping families in the Phoenix Valley choose the right estate planning vehicle for their needs for more than 35 years. In the past, we’ve written a lot about Revocable Living Trusts (RLTs) and their many benefits. However, in today’s post, we’d like to discuss the advantages and disadvantages of an Irrevocable Living Trust.
What is an Irrevocable Trust?
An Irrevocable Trust is one in which the grantor—the person who created the trust—relinquishes all ownership and control over the assets within the trust. Like a revocable trust, once assets are transferred into an Irrevocable Trust, the trust becomes the owner. But unlike an RLT, an irrevocable trust cannot be amended or terminated, except in a few very rare circumstances.
As is the case with other trusts, the grantor who sets up an irrevocable trust will name a trustee (the person who will manage the trust) and at least one beneficiary (the person(s) for whom the trust is created). Once an asset is placed into an irrevocable trust it is a gift to the trust and cannot be revoked, however, the grantor can dictate the terms, uses and rules of the trust assets.
Disadvantages of an Irrevocable Trust
We’ll start with the disadvantages of an irrevocable trust since the primary one is glaringly obvious: it cannot be changed or revoked. Once the terms are set and the beneficiary is chosen, it’s a done deal. Other disadvantages include:
- Loss of control: once the grantor places assets within an irrevocable trust they can no longer control or manage them.
- Unforeseen changes: if a grantor falls on hard times, they cannot sell assets within an irrevocable trust to regain financial security.
Advantages of an Irrevocable Trust
Despite these disadvantages, there are several significant advantages of transferring assets into an Irrevocable Trust.
- Taxes: the primary reason people set up irrevocable trusts is for estate and tax considerations. Since this type of trust effectively removes ownership of all assets placed within it from the grantor’s estate, it exempts those assets from the estate tax. Very large estates that have a large tax liability may find irrevocable trusts beneficial.
- Generational planning: the terms and conditions that a grantor can place on assets within an irrevocable trust can protect them from divorce or mismanagement.
- Lawsuit & creditor protection: another huge benefit of the irrevocable trust is that it protects assets within it from any lawsuit or creditor that may come after the grantor’s estate. This can be particularly beneficial to individuals in litigious professions, such as the medical or legal fields.
- Government benefit eligibility: an irrevocable trust allows for the transfer of property ownership to the trust, which in turn, may enable the grantor to qualify for government benefits such as Medicare and social security.
Speak with an Estate Planning Attorney Today!
When you schedule a consultation with Phelps Law Firm, we’ll help you decide among the many Trust and Will options out there, based upon your unique asset portfolio and risk analysis. And your first consultation is free! We also offer all of our clients a free Lifetime Service Package, which includes a free in-person trust review with an attorney every three years. Don’t leave your legacy in the balance; contact us today!