Protecting your assets is a fundamental goal of estate planning. It ensures that assets are managed and distributed appropriately based on your preferences.
Irrevocable trusts are just one of many tools used in estate planning. They reduce the tax burden of your estate and allow you to transfer its value to loved ones. But there are many other benefits of an irrevocable trust.
Knowing what an irrevocable trust is and the benefits it can provide you and your family gives you the resources to make the right estate planning decisions.
What to Know About Irrevocable Trusts
An irrevocable trust protects assets from legal claims, taxation, and other common financial risks. Irrevocable trusts require the permission of the beneficiary in order to be changed or canceled.
The individual who creates the trust (grantor) gives up ownership rights to the assets that are contained within it. This protects assets from legal judgments made against you.
Because you no longer are the legal owner of the assets, creditors cannot access your property.
Estate planning offers two types of irrevocable trusts: living and testamentary. A living trust is managed by the grantor throughout his or her lifetime. These include spousal lifetime access trusts, life insurance trusts, and others.
Testamentary trusts are created after the time of the grantor’s death. The person’s will can include terms that direct the creation and funding of a testamentary trust. It also prevents anyone who doesn’t have legal authority from modifying the trust.
The Benefits of an Irrevocable Trust
Assets that are transferred into an irrevocable trust are no longer included in your taxable estate. Any gains made by the assets in the trust are also exempt from estate taxes.
The Internal Revenue Service (IRS) is unable to tax these assets since they’re no longer under the ownerships of the trust’s grantor. For large estates, this may significantly reduce their tax burden while maximizing the value of assets available to beneficiaries.
But life insurance policies that are transferred into the trust may still be exposed to taxation if the grantor dies within the next three years. Life insurance may be purchased by the trust, which prevents this issue, and premiums can be paid directly to the trust.
Bypass the Probate Process
Irrevocable trusts allow the estate to bypass the probate process. Unlike wills, where assets are considered part of the public record, the assets in an irrevocable trust don’t require probate, which can save time and money.
Qualify for Medicare and Other Government Benefits
Irrevocable trusts provide benefits related to the use of Medicare. Qualifying for Medicare benefits can require individuals to spend assets in order for Medicare to cover costs related to nursing home services.
Your irrevocable trust protects your assets when having to meet these and other requirements. It also allows the assets within the trust to grow as they earn interest.
However, because the rules related to Medicare coverage can be complex, it’s important to consult with a skilled estate planning attorney to avoid unwanted issues.
This applies to Medicaid and other government benefits such as supplemental security income. The failure to protect your assets can cause them to become used up in order to cover costs for nursing home care.
An irrevocable trust is an invaluable estate planning tool that provides a wide range of benefits to you and your loved ones.
Your estate planning attorney will guide you through the process of determining if an irrevocable trust is right for you and transferring your assets so that they are fully protected.