Should You Consider an Irrevocable Trust?

Fri Mar 29, 2024 | Trusts |

Trusts are a popular option in estate planning for a variety of reasons. They allow you to transfer your assets without going through probate. They can provide significant tax benefits. You can retain greater control over your assets and allow for greater flexibility. If you are considering creating a trust, you must then decide what type of trust is right for you. An experienced estate planning attorney can help you make a truly personalized estate plan that is best suited to your needs. 

What Is an Irrevocable Trust?

As the name suggests, an irrevocable trust is one that cannot be revoked. To better understand this, however, it may be helpful to briefly discuss its opposite, the revocable trust. Also known as a “living trust,” a revocable trust can be revoked or modified at any time up until the creator (or settlor) dies or becomes incapacitated. It allows the settlor to retain an incredible amount of control over the assets of the trust up until their death or incapacitation while reaping many of the benefits of creating a trust. 

For example, you could put your house into an irrevocable trust for the benefit of your children. You could then unilaterally revoke the trust if they purchase their own homes when they become adults. This would generally not be possible with an irrevocable trust. In other words, you should consider the transfer of assets into the trust to be permanent. 

This is obviously a big decision. We do not recommend that you create an irrevocable trust without first consulting an irrevocable trust lawyer. 

Irrevocable Trusts Are Modifiable

We should point out that you can make modifications to an irrevocable trust, but the circumstances are limited and the process is not easy. Some of the more common reasons for modifying an irrevocable trust include the following: 

  • The birth or adoption of children
  • The death of a beneficiary
  • Significant changes in your financial situation
  • There have been significant changes in the needs of one or more of the trust’s beneficiaries
  • Changes in state or federal tax laws will have a significant impact on the value of the trust

There are other situations where a modification may be appropriate. An experienced irrevocable trust lawyer can discuss whether your trust is modifiable or if there are potential issues you are worried about when considering an irrevocable trust. 

If a modification becomes necessary, there are essentially four methods of accomplishing the necessary modification: 

  1. Reformation – a judicial process whereby the settlor or other interested parties can petition the court to modify the terms of the trust to conform with the settlor’s intent. This process is typically used to correct errors and ambiguities. 
  2. Settlement agreement – an informal agreement between the settlor and the beneficiaries to agree on modifications to the trust. This process does not require intervention by a court but could invite future litigation if not handled correctly. 
  3. Judicial modification – this is when the trustee or beneficiaries petition the court to modify the trust because it has become impractical, impossible, illegal, or wasteful to administer the trust according to its terms. 
  4. Decanting – a process where the trust assets are transferred into a new, more favorable trust. This process can trigger significant tax liabilities. 

Modifying an irrevocable trust is a complex process and should not be considered without engaging an irrevocable trust lawyer. 

The Benefits of Irrevocable Trusts Over Revocable Trusts

At this point, it may seem that a revocable trust is a far better estate planning option than an irrevocable trust. This may be true in some cases, but determining which option is better for you depends on your personal circumstances and estate planning goals. One way to look at it is that the primary purpose of a revocable trust is that it allows you to plan for the future while avoiding probate and yet retaining control over your assets. An irrevocable trust, on the other hand, presents  numerous advantages in addition to probate avoidance including the following: 

  • You can protect your most valuable assets from judgments and creditors
  • You can take advantage of certain estate tax exemptions and reduce the tax liabilities of the beneficiaries
  • You can gift assets and retain the income they generate

Revocable trusts are often attractive to people who are in the following situations: 

  1. The value of their assets exceeds whatever tax exemptions are available to them; and/or
  2. They have considerable potential liability exposure. 

Your attorney can help you determine whether you fall into the first category. That said, many people are in the second category and do not realize it. Your assets may be at risk if you have a business that fails or you run into unexpected financial difficulties. Your assets may be at risk if you get into an accident and are held liable for harm suffered by someone else. Creditors and others may be able to attach your assets in order to satisfy their claims. An irrevocable trust can help you protect those assets that matter most. 

Irrevocable Trusts Are Not for Everyone

We want to emphasize that there is no one-size-fits-all option when it comes to estate planning. An irrevocable trust may not be the best option for people who: 

  • Are uncomfortable relinquishing control of their most valuable assets
  • Have modest estates that can take advantage of estate tax exemptions
  • Have simple estates that can be transferred to beneficiaries more easily
  • Do not have significant potential liabilities that would put their assets at risk

An irrevocable trust lawyer can provide you with the information you need to determine whether an irrevocable trust or some other option is a better choice for you. 

Contact Ellis Law Group Today

Estate planning is a deeply personal process. An irrevocable trust lawyer from Ellis Law Group can discuss with you whether an irrevocable trust makes sense or whether some other option would better suit your estate planning needs. Contact us today by calling 561-910-7500 to schedule an appointment to discuss how we can help you protect your family and your future.

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