An Irrevocable Trust is most often used under very specific circumstances. People use Irrevocable Trusts when they need to set aside assets to protect them from claims of debts that may occur in the future, to hold them for the benefit of a specific person in need, or sometimes to reduce estate taxes. Revocable Trusts, the most common type of trusts created, routinely do not offer protections for the property held in the Trust.
The type of Trust that is most often used to protect assets against liabilities in the future is an Irrevocable or Protection Trust. An Irrevocable Trust is usually set up with a family member as the Trustee or Manager and the person creating the Trust, the Grantor, gives up the ability to make decisions and the right to control the assets placed in the Trust.
Most commonly, Grantors create Protection Trusts and place their primary home in the Trust. The Grantor may reserve the right to the “income” from the property, but they cannot maintain the right to live in the property if they want the Trust to truly protect the real estate. This can result in the loss of real estate tax exemptions, and the Grantor becomes a tenant in their own home subject to the Trustee Landlord managing the real estate.
The Grantor may also put other assets in the Irrevocable Trust, like bank accounts that they do not use for everyday expenses, but that might provide them income monthly or quarterly. If the Trust is prepared correctly, the Grantor may still be able to receive the income and protect the account from creditors. The Grantor should be very cautious about how much and what type of assets they place in these types of Trusts as these assets will not be available to the Grantor for any reason, especially in the event that the Grantor is admitted to a nursing home or is dealing with an unexpected debt or expense.
The protections come from the Grantor no longer having any rights or control to the assets in the Trust, effectually giving the assets to the Beneficiaries of the Trust, to be held in Trust until the passing of the Grantor. This can be a very uncomfortable place for the Grantor to be, as they are relying on the Trustees to handle the management and care of the assets during the Grantor’s life.
There are tremendous benefits to using an Irrevocable Trust but there are also large risks and tradeoffs, you should discuss your particular situation with an Estate Planning Attorney to determine whether or not it is right for you. For more information or to schedule an appointment to discuss your options, contact us.