As your estate plan grows, you may decide to incorporate a trust into that plan. In fact, you may eventually include more than one trust in your comprehensive estate plan. The type of trust you establish will depend on the purpose of the trust. To achieve some estate planning goals you will need to create an irrevocable trust. Because the idea may make you uncomfortable, a Murfreesboro trust attorney at Bennett | Michael | Hornsby explains why you might need to make a trust irrevocable.
What Does It Mean If a Trust Is Irrevocable?
All trusts fall into one of two categories — testamentary or living (inter vivos) trusts. Testamentary trusts do not become active during the lifetime of the Settlor (creator of the trust). Living trusts do activate during the Settlor’s lifetime. Living trusts are further sub-divided into revocable and irrevocable living trusts. When a trust is irrevocable it means that the Settlor cannot modify any of the trust terms nor revoke the trust once the trust is activated. Understandably, the idea of creating a trust that cannot be changed or terminated by you after its creation can sound counterintuitive; however, to achieve certain estate planning goals you need to make a trust irrevocable.
What Estate Planning Goals Require an Irrevocable Trust?
Creating a trust that you cannot change may sound like opening a bank account that you cannot access after it’s opened. In a way, it is exactly like that; however, unlike a bank account that you cannot access, there are a few very good reasons to create a trust that you cannot change. In fact, some common estate planning goals can best be achieved using an irrevocable trust, such as:
- Protecting assets. Throughout your lifetime you will likely work hard and invest wisely in an effort to amass a sizable estate. Protecting the assets you acquire, however, is just as important as acquiring them in the first place. That requires you to consider the numerous potential threats to your assets, including creditors, divorce, and even spendthrift beneficiaries. An irrevocable living trust can protect your assets because once assets are transferred into the trust you no longer have any legal ownership interest in the assets. Consequently, they are out of the reach of creditors and other potential threats.
- Long-term care planning. With a nationwide average annual cost of over $100,000 for 2021, long-term care (LTC) may be the biggest expense you face as a senior. Medicare will not cover the cost of LTC, causing almost half of all seniors to turn to Medicaid for help. Eligibility for Medicaid, however, depends on an applicant’s income and assets. If your non-exempt assets exceed the limit, you will be forced to “spend-down” those assets. In short, your retirement nest egg could be lost to a LTC bill. An irrevocable Medicaid trust included in an overall Medicaid planning component can help shield those assets and prevent them from being lost to the Medicaid spend-down requirements.
- Funeral planning. An Irrevocable Life Insurance Trust (ILIT) is often an integral part of a funeral and burial planning component within an estate plan. An ILIT is a highly specialized trust that takes advantage of a tax loophole. An ILIT is specifically created to own a life insurance policy and be named as the beneficiary of that policy to prevent those proceeds from becoming part of your taxable estate. The proceeds of the policy are payable to the Trustee of the ILIT and then distributed according to the terms of the policy. An additional advantage to an ILIT is that the terms of the trust can be used to ensure your funeral and burial wishes are honored.
- Special needs planning. Estate planning is even more important if you are the parent of a child with special needs. As an adult, your child may continue to need assistance provided by programs such as Medicaid and Supplemental Security Income; however, eligibility for that assistance will be based, in part, on your adult child’s income and assets. If you (or anyone else) gift assets directly to your child, he/she could lose eligibility for much needed assistance. A “Special Needs Trust (SNT)” is a very specific type of irrevocable living trust. Assets held in a SNT can be used to supplement the care and assistance provided by government assistance programs to a special needs adult. For the assets held in the trust to be disregarded for eligibility purposes, the trust must be irrevocable, and the correct statutory language must be used when drafting the trust agreement.
Contact a Murfreesboro Trust Attorney
If you have additional questions or concerns about the benefits of creating an irrevocable trust, consult with an experienced Murfreesboro trust attorney at Bennett | Michael | Hornsby as soon as possible. Contact the team today by calling 615-898-1560 to schedule your free appointment.