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5 benefits of an irrevocable trust

On Behalf of | Mar 21, 2024 | Trusts |

One of the most important things adults can do to care for their family members is to ensure they have their affairs in order. Creating an estate plan is a critical step to take in order to achieve this aim.

As part of an estate plan, it’s possible to set up trusts. These are either revocable or irrevocable, depending on whether they can be changed by the person who creates the trust, who’s known as the grantor. While an irrevocable trust can’t be changed, it comes with a few benefits that may make it worth setting one up.

Protection from creditors

Once assets are placed into an irrevocable trust, they aren’t considered personal property of the trust’s grantor. This separation means that the assets within the trust are usually out of creditors’ reach. This protection is particularly beneficial for individuals in professions with high litigation risks or those wanting to safeguard their estates for their beneficiaries.

Estate and tax benefits

Transferring assets into an irrevocable trust can lead to substantial estate and tax benefits. Assets within the trust aren’t considered part of the grantor’s taxable estate. This potentially lowers estate taxes upon the grantor’s death. Additionally, certain types of irrevocable trusts can be structured to provide income tax benefits, either by shifting tax liability to beneficiaries or by taking advantage of specific tax exemptions.

Preservation of eligibility for government benefits

Assets held in an irrevocable trust aren’t counted towards the grantor’s personal assets when determining eligibility for government benefits, such as Medicaid or Supplemental Security Income. This can be beneficial for individuals who need to lower their asset level to qualify for these programs.

Ensuring specific asset distribution

An irrevocable trust allows the grantor to specify exactly how and when assets are distributed to beneficiaries, providing a high degree of control over the estate’s future. This is especially useful for ensuring that beneficiaries are financially responsible or for making arrangements for dependents with special needs without disrupting their eligibility for public assistance. The terms of the trust are set at its creation and, except in rare cases, can’t be altered, ensuring the grantor’s wishes are carried out.

Protection of assets for future generations

By placing assets in an irrevocable trust, a grantor can protect the inheritance from potential future problems such as beneficiaries’ divorces, bankruptcy or poor financial management. This ensures that the assets are preserved and passed down through generations as intended by the grantor, providing long-term security for the family’s wealth.

These trusts are a complex but important part of a comprehensive estate plan. They must be created and funded properly. Working with a legal representative who can assist with this is beneficial for grantors.