What Is An Irrevocable Trust

An irrevocable trust is a trust that cannot be revoked, amended, or modified. Once a trust is executed and property is transferred to the trust, the trust cannot be amended anymore. For this reason, drafting and executing an irrevocable trust requires expert legal assistance because it can be irreversible once executed.

The Basic Structure

There are three persons in a trust: the grantor, the trustee, and the beneficiary. The grantor is the person establishing the trust. The trustee is the person who will hold the trust property in favor of the beneficiary. The grantor transfers his property to the trustee, who then manages it for the beneficiary in accordance with the terms of the trust. The beneficiary is the person/s for whose benefit the trust was established. The beneficiary can either receive the income, the principal, or both, depending on how the trust is worded.

In most irrevocable trusts, the grantor cannot be the beneficiary. In some cases however, the grantor can be the trustee for as long as the trust gives clear directions on its administration and does not give the trustee discretion in the management and distribution of the assets.

In an irrevocable trust, the grantor cannot change his mind and request for the return of the trust property. The beneficiary begins to have a vested right over the trust property, which can be enforced in court, once the trust document is signed and property is transferred to the trustee.

Because the irrevocable trust is a separate entity from the grantor, the irrevocable trust requires its own tax identification number (EIN) which it will use in reporting its own income.

Why Establish an Irrevocable Trust

Given the inflexibility of an irrevocable trust, you might be wondering why one would decide to establish an irrevocable trust. There are many reasons a person would decide to create an irrevocable trust: Medicaid eligibility, asset protection, and reduction of taxes, to name a few.

Medicaid Eligibility

One main reason clients come to us for the establishment of an irrevocable trust is Medicaid eligibility. Because a person’s income and asset must be low in order to avail of Medicaid, many people plan for this and transfer assets to an irrevocable trust before the Medicaid lookback period in order to decrease their assets on paper. Usually, their assets are transferred to an irrevocable trust with their children as beneficiaries. Drafting a trust for Medicaid eligibility requires the assistance of an experienced estate planning lawyer because certain provisions must be present in the trust in order for the trust property not to be included in the counting of the grantor’s assets for Medicaid eligibility.

Asset Protection

Another reason irrevocable trusts are established is to provide asset protection. Once property is transferred to an irrevocable trust, creditors cannot claim this property anymore, unless such transfer was done in fraud of creditors and in contemplation of such claim. The asset protection trust is popular among professionals with higher risk of liability, such as doctors and lawyers who can be sued for medical malpractice. Asset protection is also a concern in Medicaid, especially an asset, such as the grantor’s house, that is exempt from the count of assets for purposes of Medicaid eligibility, but not exempt from Medicaid recovery of costs when the grantor dies.

Reduction of Taxes in Some Cases

Irrevocable trusts can also reduce estate taxes, especially for those highly appreciating properties, such as stocks. A grantor retained annuity trust is a popular irrevocable trust used to transfer property to children free of estate and gift taxes. This requires expert legal assistance because the irrevocable trust needs to be carefully worded to comply with IRS regulations in order for the transfer to be free of estate and gift taxes.

Other Legal Strategies for Irrevocable Trusts to Give Flexibility

Depending on one’s objective, an experienced estate planning lawyer can add provisions in the irrevocable trust to give the grantor some flexibility despite the fact that the irrevocable trust cannot be modified, amended, or revoked.

Decanting

One strategy estate planning lawyers use is trust decanting. Decanting a trust gives the trustee discretionary power to pour the assets of the trust to a new trust with more favorable conditions but does not give the trustee power to change the beneficiaries.

Appointment of a Trust Protector

Depending on state laws, an experienced estate planning lawyer can include the appointment of a trust protector in the irrevocable trust. A trust protector can change the beneficiaries and choose from a class of beneficiaries or amend the distributions. For example, a trust protector can be given the power to choose from a class of beneficiaries, such as the descendants of the parent of the grantor. In this way, a trust protector can even choose the grantor himself as beneficiary if needed or required.

Only an experienced estate planning lawyer can help you set up an irrevocable trust. There is no DIY method to set up an irrevocable trust. Trying to DIY an irrevocable trust can result to expensive mistakes, especially when you have specific objectives such as Medicaid eligibility or asset protection. Should you need assistance in setting up an irrevocable trust, the Law Offices of Albert Goodwin are here for you. We have offices in New York City, Brooklyn, NY, and Queens, NY. You can call us at 212-233-1233 or send us an email at [email protected].