An irrevocable trust is a type of trust that has very specific rules, requirements and purposes.
Unlike a revocable trust, an irrevocable trust cannot be terminated or modified without the beneficiary’s permission. Once the grantor (creator) of the irrevocable trust funds it with his or her assets, he has no further rights of ownership to those assets. A revocable living trust, on the other hand, can be changed at any time by the grantor as long as they have capacity.
Irrevocable trusts have a grantor, a trustee and a beneficiary or beneficiaries. The grantor can dictate the terms to be followed by the trustee
A primary reason for an attorney, like an O’Fallon, Missouri trust attorney, to set up an irrevocable trust for a client is usually for estate and tax considerations, as well as asset protection for things like Medicaid and other long term care planning.
Because the assets in the irrevocable trust are no longer owned by the grantor, those assets are removed from their taxable estate. Any income created by those assets, which can be utilized by the grantor, is not taxable to the grantor either and is paid by the trust.
They can also be used to gift a residence under more favorable tax rules, to prevent beneficiaries from wasting assets (via a spendthrift provision) or to set conditions for a beneficiary to receive their inheritance, such as to graduate from college or to get married.
These types of trusts are more complex in terms of legal and tax considerations and they are a good fit for people with specific circumstances. Medicaid planning is a good example. An example would be a person who has a few hundred thousand in assets. In order to more easily qualify for Medicaid, they can sometimes create an irrevocable trust at least five years in advance of any expected need to stay in a nursing home. This could help them more easily qualify for means tested Medicaid benefits and save an inheritance for family rather than money spent at a nursing home or for other long term care.
Anyone thinking they need an irrevocable trust needs to consult with an experienced attorney. Many estate planning attorneys will not draft irrevocable trusts because of the complexity and strict rules related to them.
Meeting with an experienced trust attorney will help you figure out if an irrevocable trust is the right fit or if there is a better alternative given your situation.
Thanks to our friends and contributors from Legacy Law Center for their insight into irrevocable trusts.