In What Situations Should an Irrevocable Trust Be Used?

Apr 13, 2021
Living Trusts

Living trusts are a solid cornerstone to any estate plan, along with the traditional last will and testament. However, there are two main types of living trust: revocable and irrevocable. Both of these have different uses and different places in your estate plan. 

Revocable trusts are, by far, the more flexible of the two. With a revocable living trust, you maintain ownership of any assets you place into the trust until you die. The main benefit of a revocable trust is that your heirs will be able to bypass probate for any assets in the trust. This can save a lot of time and headache for your heirs after your death, particularly for larger assets like real estate.

Irrevocable trusts, on the other hand, mandate that you give up control of your assets to the trust. You also cannot make any changes to an irrevocable trust once you create it, hence the name. You may wonder why you would want to give up control of your assets to a trust while you are still alive. The three main reasons why our clients choose irrevocable trusts include minimizing estate taxes for heirs, eligibility for government programs and asset protection.

Estate Taxes

This is one of the most popular reasons to get an irrevocable trust. If you want to pay gift money each year, you can then use this money to buy life insurance for the purpose of an irrevocable life insurance trust. This way, it is possible to avoid paying estate taxes on the insurance in the trust after death. Another example is with a Charitable Remainder Trust, which can pay out benefits to your family while you are alive and then revert to a donation to the charity of your choice after your death.

Government Programs

In the event that you want to leverage Medi-Cal or Medicaid to help pay for assisted living or other expenses, you may only possess assets within a certain income threshold. Essentially, if you have too much money, you may render yourself ineligible for Medicaid; this can be a huge financial burden. In some situations, an irrevocable trust can divest you from these assets. In essence, the irrevocable trust acts like a shelter.

Asset Protection

Protecting your assets from creditors may concern you. In certain cases, an irrevocable trust can help with this. Generally, in order for this to be an option, you must reside in a state that has very favorable trust laws (such as Nevada or Delaware). Also, the trustee (you) cannot be directly related to the beneficiary.

Whether or not irrevocable trusts are a good idea in your case depends on your specific situation. Unless you are very wealthy, it is unlikely that you will need an irrevocable trust for estate tax avoidance. If you do not plan on qualifying for Medicaid, you do not need a trust for this purpose. In terms of asset protection, it is also possible that a court may reclaim your assets if it finds that you acted in a fraudulent manner. 

In conclusion, it is important to know all of your options before choosing an irrevocable trust. Contact us today at AmeriEstate to learn more.