The term “irrevocable trust” is sometimes used during estate planning; however, the exact definition of this term is not always clear. An irrevocable trust is a legal agreement that enables someone to transfer their assets to another person. This type of trust cannot be modified after it is signed unless the beneficiary gives permission to do so.
The benefits of an irrevocable trust
An irrevocable trust offers unique financial benefits that other trusts do not. Because of the binding nature of the agreement, the terms can only be changed at the discretion of the beneficiary. The main reasons to use an irrevocable trust are:
- To reduce the taxable amount of an estate. When you create an irrevocable trust, you transfer all rights of that asset to a beneficiary. Your estate cannot be taxed after you pass since it is no longer under your control.
- To become eligible for government assistance. Since these programs typically have an income cap, moving assets into an irrevocable trust eliminates this risk.
- To protect assets from creditors. An irrevocable trust protects assets from being liquidated in the case of lawsuits or other situations that you may be otherwise liable to pay.
It is also important to understand the limitations of an irrevocable trust. Since this type of legal agreement is binding under the original conditions, it cannot be changed. This means that the beneficiary, amount of the trust, or other details are no longer under your control after it is signed. You cannot make amendments or change your mind. The beneficially is the only party in the agreement who can make a change.
Additional types of trusts to consider
Revocable or living trust
In contrast, a revocable trust, or living trust, has much more flexibility. The creator of a revocable trust has the power to change the terms, update the beneficiaries, or modify how the trust assets are managed.
Since the creator of the revocable trust still retains some level of control, the assets under the trust do not fall under the same type of protection as an irrevocable trust. If the creator of the revocable trust is sued, the assets may be taken to settle the case. When the creator of the trust dies, the assets are also subject to estate tax.
Special needs trust
A special needs trust is a unique agreement that offers assistance to someone who requires extra financial aid who may be physically or mentally ill or disabled. The main benefit of a special needs trust is that the money that the beneficiary receives does not risk their eligibility for public assistance programs. Certain government programs, like Medicaid and Medicare, require the beneficiary to live within a specific income bracket. A special needs trust does not contribute to this income, so it can safely offer additional financial help without eliminating other assistance programs.
Special needs trusts can be used for designated expenses outside of basic food and shelter, including medical bills and at-home care.
With estate planning, it is essential that you consider all of your options to ensure that your assets are used the way that you wish. When considering a trust, spend time researching which type of agreement is best suited for your needs, as well as your beneficiaries.