A trust can be and often is an important part of a comprehensive estate plan, and few estate planning tools are as widely used and as broadly beneficial as an irrevocable trust.
Irrevocable trusts can accomplish a host of asset protection and wealth transfer goals, from shielding assets from creditors to providing for individuals with special needs to facilitating charitable giving in a way that also offers significant tax advantages. A properly structured irrevocable trust can also help seniors protect their hard-earned assets from being drained by long-term care costs and instead qualify for Medicaid benefits.
These are just a few reasons an irrevocable trust is part of so many comprehensive estate plans. At Ginsberg Shulman, we prepare irrevocable trusts tailored to each client’s circumstances, needs, and objectives. When you meet with us, we’ll take the time to get to know you, answer all your questions, and present and explain your options so you can make informed decisions about your future. We’ll work together to set a course that provides you and your loved ones with clarity, security, and peace of mind.
What Is an Irrevocable Trust?
As the name indicates, a central feature of an irrevocable trust is that it cannot be unilaterally revoked, modified, or terminated by the trust’s creator once established. With an irrevocable trust, the “grantor” – the creator of the trust – relinquishes all ownership and control of trust assets to the trustee, who manages the trust assets for the beneficiaries, including the grantor.
While transferring ownership and control of your assets while you are still here may sound like a scary proposition, it is precisely that divestment of ownership and control that allows an irrevocable trust to accomplish so many critical estate planning objectives. And the reality is that a properly established irrevocable trust should not affect the grantor’s ability to reap the benefits of their assets during their lifetime as the trustee will make distributions as provided in the trust document.
What Can an Irrevocable Trust Accomplish?
There are several different types of irrevocable trusts designed for a variety of financial planning and wealth transfer objectives. An irrevocable trust can:
- Reduce tax liabilities. An irrevocable trust can reduce or eliminate any applicable estate taxes by removing trust property from the grantor’s taxable estate. If the trust includes appreciating or income-earning assets, it could also help reduce income and capital gains taxes.
- Avoiding probate. Only those assets in your name at the time of your death are subject to the time-consuming, expensive, and often-frustrating probate process. If all of your assets are in your irrevocable trust, your trustee can distribute those assets without probate court involvement.
- Protect assets from creditors. Since the grantor has no ownership or control of the assets in the trust, any creditor of the grantor who seeks to enforce a judgment or other outstanding obligation cannot look to the trust assets to satisfy their debt.
- Qualifying for government benefits. Due to the astronomical costs of long-term care—most of which Medicare doesn’t cover—many Florida seniors find they cannot afford nursing home care or need to drain all of their retirement savings and children’s inheritance to pay for it. With proper planning, an irrevocable Miller Trust or Qualified Income Trust in Florida can help seniors qualify for Medicaid benefits while preserving their assets for themselves and their heirs.
In addition to the advantages described above, several kinds of specialized irrevocable trusts allow individuals to facilitate several distinct and specific estate planning goals.
Irrevocable Life Insurance Trusts
Under an Irrevocable Life Insurance Trust (ILIT), you name yourself as the grantor of the trust and name the trust as owner and beneficiary. You designate a trustee, such as a trusted relative or financial advisor, who agrees to hold the policies that you contribute to the trust, pay premiums, collect the policy proceeds upon your death, and administer those proceeds for the benefit of your spouse, children, and/or other family members named in the trust instrument.
Since you no longer own the policy, and since your spouse and children are no longer the beneficiaries, the IRS will not include the proceeds when calculating the value of your estate. However, if you want to change the beneficiaries of an existing policy from your spouse and/or children to an ILIT, those proceeds still may wind up included in your estate if you die within three years of such a change. Internal Revenue Code Section 2035 provides that if you own or have “incidents of ownership” on an existing life insurance policy on your life, and transfer the policy or release the incidents of ownership within three years of your death, then the proceeds will still be included in your estate for estate tax purposes.
Charitable Remainder Trust (CRT)
A Florida charitable remainder trust is a specialized, irrevocable trust that allows you to transfer ownership of assets to the trust during your lifetime to provide an income stream to a designated charity or charities. The regular donations (at least once a year) can be made for the rest of your life or a specific number of years. The income interest in the assets is distributed to you and/or your beneficiaries, while the remainder interest goes to the charity at the end of the trust’s term.
There are many benefits to a CRT, including:
- it may generate substantial income for the donor
- it can create a considerable income tax reduction
- it may eliminate any capital gains taxes on assets transferred to and sold through your charitable trust
Grantor Retained Annuity Trust (GRAT)
Through a GRAT, you can transfer the growth and appreciation of assets to trust beneficiaries at a reduced gift and estate tax cost. You do so by transferring assets you expect to appreciate into this irrevocable trust while retaining an annuity stream for a fixed term. At the end of the term, the trust passes the remaining assets to family members or other beneficiaries outright or in further trust.
Although your transfer of assets to a GRAT is considered a gift, the gift amount is reduced by the actuarial value of the annuity you retain. This means that the amount of the taxable gift may be much smaller than the value of the assets transferred. If the asset’s growth outperforms the AFR hurdle rate, the additional increase is transferred to the trust’s remainder beneficiaries free of gift and estate taxes.
Irrevocable Special Needs Trust
If you have a child or other family member with special needs, you want your loved one with special needs to have access to all available resources, including government benefits such as Medicaid and Supplemental Security Income, as well as state programs and benefits. An irrevocable special needs trust allows you to provide for your loved one with your own assets while simultaneously protecting their eligibility for public benefits.
Since eligibility for benefits such as Medicaid or SSI is based on assets and/or income, an individual with special needs who directly inherited a substantial amount of money could lose their ability to receive such benefits. By putting those assets into a special needs trust instead, their value will not be counted when determining whether such benefits remain available.
Contact Ginsberg Shulman Today to Discuss Your Comprehensive Estate Plan
Irrevocable trusts are just one of the tools we use at Ginsberg Shulman to help our clients protect themselves, their families, and their futures through comprehensive estate planning. Our experience, personal approach, and commitment to our clients make the estate planning process positive and comfortable. If you’re ready to discuss your plans or want to learn more about irrevocable trusts and other estate planning options, please contact Ginsberg Shulman today.
