Irrevocable trusts are a powerful legal instrument that can help you achieve specific estate, financial, or long-term care planning goals, such as protecting assets, facilitating the distribution of inheritances, and mitigating tax liabilities. Are you interested in learning about the benefits of these trusts and whether they might be right for you? If so, contact an estate planning lawyer from Palmer & Slay, PLLC, for an initial evaluation about irrevocable trusts and to get experienced legal guidance regarding whether these types of trusts can help you achieve your objectives.
Asset Protection
One of the most frequent reasons why people use irrevocable trusts in their estate plans is to benefit from an irrevocable trust’s asset protection. Placing assets in an irrevocable trust legally removes them from the settlor’s estate. Thus, the settlor’s creditors may not reach assets in an irrevocable trust to resolve the settlor’s debts. Similarly, a beneficiary’s creditors may not assert claims against trust assets until the trust distributes them to the beneficiary. Irrevocable trusts can help individuals protect assets and family wealth if they may face substantial personal liability, such as a doctor or lawyer facing a malpractice judgment or a business owner becoming liable for their business’s debts.
Reduction of Estate Taxes
Irrevocable trusts can also help individuals and families minimize estate taxes. Removing assets from one’s estate by placing them in an irrevocable trust will reduce the value of one’s estate, which may allow one’s estate to minimize or avoid estate taxes altogether by leveraging estate exemptions. High-net-worth individuals whose estates exceed estate tax exemption thresholds can benefit from utilizing irrevocable trusts in their estate plans to reduce or eliminate estate taxes.
Irrevocable trusts can also help with other tax management strategies, such as mitigating or managing capital gains taxes from selling assets like real estate or business interests.
Medicaid and Long-Term Care Planning
Many individuals and couples use irrevocable trusts for long-term care or Medicaid planning. Medicaid benefits can help people afford long-term home health care or nursing home care. However, the Medicaid program imposes strict financial eligibility thresholds to qualify for benefits. Irrevocable trusts can remove assets from a person’s or couple’s estate to help them get under the monetary thresholds for Medicaid and other means-tested benefits, enabling them to access long-term care without spending their family wealth.
Avoiding Probate
People frequently use trusts as an estate planning tool to avoid probate. After a person’s death, their estate must go through probate – the court-supervised process of gathering a decedent’s assets, paying the estate’s debts, and distributing estate assets to heirs and beneficiaries. However, probate can become expensive and time-consuming. Families may wish to avoid probate to eliminate the need to spend money on the estate administration process and to distribute inheritances more quickly. Irrevocable trusts allow families to avoid probate since assets in a trust leave the settlor’s estate. Rather than probating the distribution of assets, a trustee of an irrevocable trust can distribute income and principal from trust assets to beneficiaries per the trust document’s terms.
Providing for Loved Ones
Individuals can use irrevocable trusts to manage the distribution of inheritances and family wealth to loved ones. Trusts can manage wealth for loved ones, including young children and family members with special needs. Special needs trusts can help disabled loved ones qualify for means-tested government benefits while providing them with additional resources to improve their quality of life.
Charitable Giving
Families may use irrevocable trusts to facilitate charitable giving. Charitable giving goals may include leveraging tax benefits as part of a comprehensive financial or estate planning strategy or establishing a family legacy. The permanent nature of an irrevocable trust may allow individuals and families to take immediate tax benefits for future charitable giving. Individuals and families can set up charitable lead trusts, which distribute income and principal generated from investing trust assets to philanthropic causes for a designated period, with the remaining assets distributed to non-charitable beneficiaries, such as the settlor’s family members. Families may also use charitable remainder trusts, allowing them to benefit from assets for a set period before donating them to charitable causes. Alternatively, families may create irrevocable trusts to operate long-lasting philanthropic foundations. Charitable giving allows families to use some of their wealth to benefit and improve their communities.
Protection Against Financial Mismanagement
Finally, families can use irrevocable trusts to protect loved ones’ inheritances and family wealth against financial mismanagement. By keeping inheritances in an irrevocable trust, families can shelter loved ones from losing those inheritances due to impulsive financial decisions or other personal issues. The family can select a professional trustee, such as a financial advisor or trust company, to manage the trust. Families can create spendthrift trusts that distribute inheritances in smaller, manageable payments, which can protect a loved one’s inheritance from poor choices, creditors, or divorce. Furthermore, by placing distributions in a trustee’s discretion, families can avoid conflicts over inheritances or the use of family wealth.
Potential Drawbacks of Irrevocable Trusts
However, irrevocable trusts can have drawbacks for some individuals and families, making them less than ideal for estate planning. These downsides include:
- Loss of control over assets: You cannot remove assets placed into an irrevocable trust, meaning you must permanently relinquish control over those assets.
- Limited ability to change the trust: You cannot change the terms of an irrevocable trust’s trust document or replace the trustee except in limited circumstances, which usually require consent from the trust’s beneficiaries or court approval.
- Irreversible nature: Because you cannot change or revoke an irrevocable trust, structuring one requires careful planning.
Contact an Estate Planning Attorney Today to Discuss Your Options
Are you thinking about adding an irrevocable trust to your estate plan? If so, an experienced estate planning lawyer from Palmer & Slay, PLLC, can help you understand the benefits of irrevocable trusts and advise you on whether they can help you meet your goals and interests. Contact us today for a confidential consultation with our legal team to discuss your options.
Palmer & Slay, PLLC, assists clients within Mississippi, including Scott County, Rankin County, Brandon, Flowood, East Jackson, and beyond.