You may be familiar with revocable (living) trusts, but have you heard of irrevocable trusts? The main reasons that people set up irrevocable trusts are to reduce or minimize estate taxes and for asset protection.
Hiring an estate planning attorney or an attorney for trusts is a great idea if you are considering creating an irrevocable trust. A good attorney knows the ins and outs of the trust process and will be able to walk you through each step. The process may seem complex and scary, but it doesn’t have to be.
What exactly is an irrevocable trust?
An irrevocable trust is an agreement with a grantor, trustee, and a beneficiary or beneficiaries that cannot be amended or changed without the beneficiary’s permission or a court order. The grantor of the trust is essentially relinquishing all rights of ownership of the assets and the trust.
The grantor is the person setting up the trust, they are the ones contributing the assets, funds, or property, to it. Once they do so, they cannot change it or take it back. The trustee can be an individual, a group of individuals, a bank, or a company. The main goal should be that the trustee is someone you have faith in and someone that is responsible enough to deal with your finances. The beneficiary is the person the grantor is leaving the trust to and must be gone through first if any changes or amendments to the agreement need to be made.
Uses and benefits of an irrevocable trust
As previously mentioned, irrevocable trusts are used to save on estate taxes and protect your assets, but they can also be used to qualify for certain government programs and to avoid probate.
The federal estate tax is levied on the assets of a decedent (deceased person) before they are distributed to the beneficiaries. This tax can progress from 18%, for the value of an estate leading up to $1 million, to 40% for the remaining value and most of the time only applies to large estates, which total over $12.92 million for estates in 2023. Some states have a state estate tax, but here in Florida, there isn’t one. Since the grantor has removed all incidents of ownership by creating a trust, the assets become exempt from their taxable estate.
Asset protection is one of the most attractive features of an irrevocable trust. They keep the assets in the trust out of the reach of creditors because, again, the grantor has removed the assets from their ownership. So, if you have a high risk of litigation or work in a field prone to lawsuits, it could be helpful.
However, it is possible for a court to determine that an asset protection trust, domestic or foreign, was created to intentionally defraud creditors. This would lead the grantor to be in some serious legal trouble, and effectively force you to undo the transfer of assets into the trust.
Eligibility for government benefits
By creating an irrevocable trust, you are essentially depleting your property, which can help ensure you qualify for certain government benefits like Social Security and Medicaid. This can be useful if you need nursing home care that would be otherwise expensive. Additionally, these trusts can help you secure these benefits if you have a special needs child that needs care.
Lastly, avoiding probate can be advantageous for many people. Although setting up trusts can be more expensive upfront, it can save you from having to experience the long, expensive probate process. This is very time-consuming because it has to move through court, and when you spend a long time in court you can end up with attorney’s fees that pile on and become costly. Avoiding probate can save your loved ones a lot of stress during a time that is already so painful, so they can focus on their grief and recovery.
Spendthrift and discretionary distribution protections
Since asset protection is such an important piece of an irrevocable trust, it is good to know what the major legal principles involved are. In this case, they are spendthrift protection and discretionary distribution protection.
In order to protect the beneficiary’s interest in their trust from creditors, the agreement will often include what is called a spendthrift clause (provision). This clause states that the beneficiary may not convey or assign their beneficial interest, which is their right to the assets, to anyone else.
For example, if a beneficiary was to get married, they cannot assign their beneficial interest to their spouse. Essentially, what this does is prevent creditors from forcing the beneficiary to make an involuntary assignment to pay off the debts they have.
The other principle, discretionary distribution, is often included within the spendthrift clause of a trust, however, it is a separate legal protection. Discretionary distribution is the part of the agreement that allows the trustee to exercise discretion over the distribution of the assets. They can control the timing and amount of the disbursements, even when the trustee is also the beneficiary.
In that case, the trustee/beneficiary must maintain distributions within a reasonable standard for their situation. Florida law restricts creditors of the beneficiary from compelling the trustee to make a distribution that would leave the beneficiary vulnerable to creditors.
How do you modify an irrevocable trust?
As mentioned before, part of the definition of an irrevocable trust is that it cannot be amended or changed. So, what happens if the grantor changes their mind about an aspect of the trust or if the trust doesn’t have termination provisions?
Irrevocable trust modification process
If all of the involved parties come to a consensus that the trust needs to be altered, they are allowed to do so according to Florida law. The interested party may ask a court to reform a trust agreement as long as they have proof that the terms of the trust in its current state are insufficient according to the grantor’s intent.
The courts can also have the trust modified in order to maximize tax benefits when laws change. Also, it can sometimes be the case that the beneficiary isn’t aware of the trust’s existence or its terms until after the grantor passes away. In this scenario, if changes need to be made, they can be as long as all of the beneficiaries agree unanimously.
Generally, it is specified in the agreement that there is a certain date or circumstance that, when met, terminates the trust. Without these provisions, the trust will last for a long time, which can be very inconvenient for the parties involved. In Florida, a trustee can terminate a trust that holds assets totaling up to $50,000, if they conclude that the value is not worth maintaining the trust. Aside from that, judicial proceedings can terminate a trust in other circumstances.
Death of the Grantor and the SECURE Act
In the past, when the grantor of the trust passed away the beneficiary had the ability to accept their distributions over time.
In 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) changed this in order to aid more Americans in saving for retirement. This act limited the length of time a non-spousal beneficiary can stretch the disbursements of the assets after the death of the grantor to 10 years.
The tax implications of creating a trust can be difficult to navigate and can change over the years, so obtaining advice from an estate attorney is always recommended.
What to look for in a good irrevocable trust attorney
As helpful as irrevocable trusts may be, they have their downsides and there are features you should be cautious of.
They are, in their nature, inflexible, which can create a lot of problems. This might seem obvious considering the name, but it is still something you should remind yourself of if an irrevocable trust is something you are considering. You might not be able to change any of the terms or it could be extremely difficult to do so. On top of that, they are far from simple, and you lose control over your assets. They have their own tax ID, require separate tax returns, are expensive, and you probably won’t be able to change, remove, or add beneficiaries.
The bottom line is, you have to be very sure that you want an irrevocable trust, and you must be certain of all the terms of the trust when you are creating it. You do not want to end up in a situation where you regret creating the trust or want to change the terms of it, but you can’t. Hiring an attorney to help you create the trust can ensure that the decision you make will be something you are confident in throughout the duration of the trust’s lifetime.
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Our Orlando irrevocable trust attorneys are here for you
Here at the Orlando Law Group, we have outstanding Orlando estate planning attorneys with decades of valuable experience with irrevocable trusts and other aspects of estate planning. If you have questions about anything discussed in this article, give our office a call at (407) 512-4394 or fill out our online contact form to schedule a consultation.
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