When it comes to the tools you can use to plan your estate, you have several options. One such tool is the irrevocable trust.
Of the five main types of trust you can use to organize your estate, an irrevocable trust is perhaps the least practical. When you create an irrevocable trust, you lose all control over any property you transfer into it. Not only that, but you cannot easily change the terms of the trust without sound and specific justification. This may cause you to wonder, why might anyone want to create such a trust? Kiplinger shares the three main benefits of using an irrevocable trust.
Help disabled loved ones qualify for Medicaid
If you accrued a substantial amount of wealth in your lifetime, and if you have a disabled loved one, an irrevocable trust can help you shelter income and assets for Medicaid purposes. Sheltering income and assets is crucial for minimizing the amount of money to which your loved one has access, as if he or she can access too much wealth, he or she may become ineligible for government benefits. To qualify for Medicaid despite acquired wealth, the beneficiary of the trust must have little to no control over it.
Minimize estate tax burdens
Another reason you may consider using an irrevocable trust is if you have substantial wealth to your name. There are several types of irrevocable trusts you can use to minimize your estate tax burdens, including a charitable remainder unitrust, an irrevocable life insurance trust and a grantor retained annuity trust. Each of these trusts keeps family wealth “separate” from beneficiaries and, therefore, serves as a great way to avoid estate taxes upon death.
Safeguard your assets from lawsuits
If you are in a profession that puts you at considerable risk for lawsuits — such as a surgeon, real estate developer or architect — and if you have considerable wealth, an asset protection trust can help safeguard said wealth against legal judgments. For this type of trust to be effective, the creator and beneficiary must not be of any relation. Moreover, you must live in one of the few states that allow them, such as Nevada, Delaware and North Dakota.
Though an irrevocable trust does have its place, it is almost always impractical. Before you relinquish all control of your wealth, consider other, more realistic options.