Why You Should Avoid Irrevocable Trustsmahfoodlaw
When planning your estate, you’ll likely hear and read plenty about the benefits of trusts for saving money and transferring your assets to your beneficiaries easily. However, it’s important to distinguish between different types of trusts, as there are so many options out there. It’s easy to confuse a living trust (which is ideal for estate planning) with an irrevocable trust. Irrevocable trusts are not a smart idea for most people – here’s why.
The reason that living trusts do work so well for estate planning is because they can be changed over time as needed. As you age and your life circumstances change, you’ll likely want to alter your living trust, which is fairly easy to do just by working with your trustee and your lawyer to change the wording of the trust. However, irrevocable trusts cannot be changed after you’ve set them up. In fact, your assets are technically not yours anymore once they’ve been put into an irrevocable trust.
When you put your funds in an irrevocable trust, you are permanently transferring them to the beneficiary. The trustee, who manages the trust, has complete control over the assets. You cannot change any of the terms of the trust once they are set, and you cannot get your assets back if you need them. There are very few benefits to this type of trust, as they are very risky. Even if you don’t currently think that you will want to change the terms of a trust, you never know what could happen in the future to alter your decision.
There are very few circumstances under which an irrevocable trust would have benefits for you financially. If you want to use your trust to protect your assets from creditors in the future, you may need your trust to be irrevocable for your assets to legally be protected. However, most consumers do not need this protection. There are also situations where putting your assets in an irrevocable trust could help you qualify for Medicaid and other government assistance programs. However, it is very rare that the benefits of these programs would be worth the risks of using an irrevocable trust.
The final circumstance under which you might consider an irrevocable trust is to avoid estate taxes. By using small amounts of money to purchase life insurance and then putting those benefits in an irrevocable trust, you can often avoid estate taxes. However, unless you are extremely wealthy, this is usually not worth the risks, as the estate taxes are only a major consideration for the very wealthy. Many people attempt to create this kind of trust thinking that they will save huge amounts of money, but in reality this just makes it more difficult to transfer money and other assets to your family in the long run.
If you are considering making an irrevocable trust for any reason, you should talk to a qualified estate lawyer first. They will be able to examine your current financial situation and determine if an irrevocable trust will actually have any benefits for you under current IRS law. If there is another estate planning option that is a better fit for you, they will be able to direct you there and help you set up the appropriate documents. Chances are, if you’re thinking about an irrevocable trust, there is another estate planning tool out there that can help you get the results you want safely. For most people, the combination of a living trust and a pour-over will is enough to transfer your assets to your desired beneficiaries while still enjoying the many benefits that you will get from a trust.