There are numerous different types of trusts used in the field of estate planning. One basic distinction between them is the matter of revocation. You can revoke or dissolve some types of trusts, and you cannot revoke others.
As the name would indicate, an irrevocable trust is a trust that cannot be dissolved. Once you convey assets into this type of trust, the decision is final. You cannot change your mind and take back the assets in the trust. Plus, you cannot change the terms of the trust under most circumstances.
The fact that you cannot revoke this type of trust can sound disconcerting, but these trusts do provide benefits that are important to some people. Let’s look at some of the reasons why you may want to use an irrevocable trust.
Wealth Preservation
When you are planning your estate, you should evaluate your position relative to the estate tax credit or exclusion. The amount of the federal estate tax exclusion is $5.45 million during the current calendar year. You can transfer up to $5.45 million before the estate tax would kick in.
We should point out the fact that asset transfers to your spouse are not taxable, so the estate tax would only be applicable if you are transferring assets to others.
All of the property that is in your direct personal possession would be counted, and this would include your real property. There are some people who do not consider themselves be wealthy who own valuable tracts of land. Even if the land was purchased by your ancestors many years ago at a relatively low price, estate tax liability would be based on the current value of the property.
If you are exposed to the federal estate tax, there are irrevocable trusts that can be used to preserve wealth for the benefit of your loved ones. You could potentially transfer real property at a tax discount if you convey it into a qualified personal residence trust.
When market conditions are favorable, a grantor retained annuity trust could be used to facilitate a tax efficient asset transfer if you are in possession of highly appreciable assets.
Charitable lead trusts can be beneficial for these purposes under some circumstances, and many people who have estate tax concerns establish generation-skipping trusts. With a generation-skipping trust, two generations can benefit from assets in the trust, but there would be just one instance of taxation.
These are some examples, but there are other irrevocable trusts that can be used for tax efficiency purposes under certain circumstances.
We should also point out the fact that there is a state-level estate tax in New Jersey, and the exclusion is just $675,000.
Medicaid Planning
Most seniors will need long-term care eventually, and Medicare does not pay for it. Medicaid does pay for long-term care, but you can’t qualify if you have significant assets in your own name, because it is a need-based program.
It would be possible to convey assets into an irrevocable trust so that you could qualify for Medicaid if you ever need long-term care.
Asset Protection
Many people are concerned about lawsuits. There are irrevocable trusts that can provide asset protection, and you could also use this type of trust to protect assets that you are leaving to a spendthrift heir.
Special Needs Planning
People with disabilities often rely on need-based government benefits. If you want to help out a loved one with a disability who is relying on these benefits, you could use an irrevocable special needs trust.
The beneficiary could not directly handle the assets that have been conveyed into the trust. You would name a trustee to administer the trust, and the trustee would manage the assets.
Resources in the trust could be used to improve the beneficiary’s quality of life, but eligibility for need-based government benefits would not be impacted.
Attend a Free Seminar
If you are interested in the possibility of creating an irrevocable trust, you would probably like to obtain more detailed information. You can contact us to schedule a personal consultation if you would like to do so, but another option exists if you would like to enter into the relationship step-by-step.
We get out into the community offering free seminars on an ongoing basis, and you can get to know us and learn a great deal about the estate planning process if you attend one of our sessions. They are free to attend, and you can get all the details if you visit this page: Central NJ Estate Planning Seminars.
Alan Augulis, Estate Planning Attorney
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