There are many different kinds of trusts, and they all serve different estate planning purposes. An irrevocable trust can be a powerful means of protecting assets.
Irrevocable sounds permanent, and it is—and that’s a good thing, says The Patriot Ledge in a recent article, “Sometimes irrevocable is good.” Here’s an example: if you have a daughter-in-law that you’re not thrilled with, leaving assets outright to your son will mean that she has joint ownership. If they divorce, she may end up with half of everything, or more, depending on the terms of the divorce.
However, if those assets were left to your son through an irrevocable trust, the assets would be under the control of a trustee you select for the benefit of your son only. The trustee could be a professional or another trusted family member. You can even add terms in the trust that allow the son’s beneficiary to change trustees, in case there’s a falling out later in life between the trustee and the beneficiaries. The trust may include liberal terms to allow for distributions for the beneficiaries and others at the trustee’s discretion.
Another spot where irrevocable may be ideal is with life insurance, because life insurance owned or controlled by the insured may be includable in the decedent’s estate. It depends on the size of the policy and the estate. For federal purposes, the death tax threshold is $11.18 million per individual. However, some states have their own estate tax. For example, in Massachusetts, the state death tax begins when assets (including the death benefit of owned life insurance) hits $1 million per decedent.
However, if the life insurance policy is owned by an irrevocable trust with an independent trustee other than the insured, the policy may not be included in the insured’s estate for tax purposes.
Irrevocable also makes sense, when gifting a business or investment real estate to children or minors. To avoid or reduce estate taxes, many wealthy families frequently delay in making gifts to the next generation.
If minority interests in businesses or business real estate were to be gifted via an irrevocable trust or other entity, the assets could be protected from creditors of the minority owners. This also precludes the minority from spending all the money, affecting the management or operations of the underlying business or getting any distributions from the business or the trust.
An experienced estate planning attorney will be able to determine which trust is best for your situation.
Reference: The Patriot Ledger (November 2, 2018) “Sometimes irrevocable is good”