Types of Irrevocable Trusts
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Phelps Law is a second generation estate planning firm in Gilbert Arizona, where helping you plan for your family’s future isn’t just part of what we do, it’s all we do! In considering which type of legal document might be best to protect your legacy, you’ve probably come across the two most common types of living trusts: the Revocable Trust and the Irrevocable Trust. While both types of trusts have their advantages, we’d like to discuss the different types of irrevocable trusts, and when you might consider using them.
What is an irrevocable trust?
In a previous blog post we dove into some of the details of an irrevocable trust and when an individual might prefer an irrevocable trust over a revocable trust to protect their assets. The primary distinguisher of an irrevocable trust is that it cannot be amended or revoked—as the name would imply. Once the terms of the trust are established, they are set in stone. Among the many benefits of an irrevocable trust are that (as is also the case with many revocable trusts) it protects assets from creditors or lawsuits and it allows the grantor—the person who created the trust—to outline how the assets of the trust may be used. Among the benefits of this trust are the guarding of assets from mismanagement by any involved parties, and keeping assets from being siphoned off through divorce proceedings.
What are the common types of irrevocable trusts?
Estate planning is a diverse and intricate field. And while it may seem ideal to have a single type of trust that could be used for every family scenario, a one-size-fits-all trust will fall short of meeting the individual needs and unique family makeup of each household. That’s where hiring an experienced and qualified estate planning attorney comes into play. When you choose Phelps Law, we’ll go over your assets, your financial goals, and your concerns in order to help you choose the right instrument to protect your estate and maximize the inheritance your beneficiaries receive. Due to the complex nature of estate planning, we strongly advise against DIY estate plans.
Having said that, we return to the question at hand: is an irrevocable trust right for you? Here are a few of the most common types of irrevocable trusts and when they might be most useful.
The Special Needs Trust
While you can certainly leave money and assets to a special needs child in your Living Trust or Will, or by naming the child as a beneficiary on a life insurance policy, leaving a direct bequest to a special needs child may disqualify him or her from essential benefits under the Supplemental Security Income (SSI) and Medicaid programs. In addition, without proper planning the money or property that passes to the special needs child will be controlled by the court, which results in unnecessary court costs and legal fees related to conservatorships and guardianships—not to mention the fact that the court makes the choices about who will be the child’s guardian and conservator, and those choices may well be contrary to your personal preferences.
When you set up a special needs trust, you appoint a trustee to distribute funds or purchase necessities for your special needs family member. Because the assets of this type of trust belong to the trust and not the beneficiary, your special needs family member will still qualify for supplemental income and government benefit programs.
Protective Inheritance Trust
A Living Trust or will that gives full, outright ownership of the inherited assets to the beneficiaries needlessly exposes them to the claims of ex-spouses, creditors, lawsuits, the government and, of course, estate taxes. A Protective Inheritance Trust, also known as an Asset Protection Trust, on the other hand, is like leaving money and assets in a personal vault for each beneficiary. Only the beneficiary has the key to open and close the vault at will.
Unlike other trusts, the beneficiary may have full flexibility and control over his or her own Protective Inheritance Trust (if you wish). That means the beneficiary may be his or her own trustee, control how the assets are invested, decide how and when money is distributed, and even direct who may receive the assets when that beneficiary passes away. But if a crisis happens in the life of a beneficiary, the assets in the trust are protected, because technically the beneficiary does not “own” the assets.
Life Insurance Trust
With this type of trust, the trust owns your life insurance policy and is the beneficiary of the policy as well. Why create such a trust? We most often advise individuals to create a life insurance trust for estate tax purposes, or if there is a concern about leaving a large sum of money to a minor or irresponsible adult child.
When set up properly, life insurance benefits can be distributed to the beneficiaries of the trust without being included in the taxable estate of the insured. One thing to consider here is that it’s more of a transfer of the tax burden than an avoidance altogether, since the death benefits of the policy can be taxed as a part of the beneficiaries’ estate.
If the insured has beneficiaries who are minors or irresponsible adult children, the Life Insurance Trust can allow the grantor to appoint a trustee who will manage and distribute the assets of the trust in accordance with the grantor’s desires.
Need help planning for your future?
Estate planning is what we do all day, every day! If you have questions about what type of trust would be right for your family, give us a call today!