Irrevocable Trusts
One of the most valuable estate planning tools is the irrevocable trust. The phrase “irrevocable trust” refers to a type of trust that cannot be modified or terminated without a specific condition or term being fulfilled or without the permission of a named beneficiary. Also in the case of an irrevocable trust, once an individual (called a “settlor” or a “donor”) transfer property into the trust, the individual’s ownership of the property is effectively removed and the trust becomes owner of the property. In the event that an individual decides to create an irrevocable trust, it can be extremely wise idea to consult with a knowledgeable and seasoned attorney about the matter. This entry will examine some basic information concerning irrevocable trusts in the Commonwealth of Massachusetts.
How an Irrevocable Trust Works
An irrevocable trust can be created during the life of an individual or upon death. Irrevocable trusts involve three individuals: the individual who creates the trust (“settlor” or “donor”), the party who manages the trusts (“trustee”), and the individual or individuals who receive property, income or in-kind payments from the trust (“beneficiaries”). An irrevocable trusts is established from a document that clearly delineates how assets and/or income will be managed and distributed. An estate planning attorney can prove essential in drafting these terms of an irrevocable trust.
Irrevocable Trusts Allow Individuals to Avoid Probate
An irrevocable trust protects an individual’s assets and property from the probate process. Instead, the assets or property of the trust will be managed by another individual and the assets will later be distributed to individuals who are named in the trust as beneficiaries. As a result, irrevocable trusts offer the opportunity to reduce the time and expense associated with the probate process.
The Limitations of an Irrevocable Trust
Irrevocable trusts are not without some potential limitations. Most importantly, parties must understand that assets transferred to an irrevocable trust cannot be removed or given back in the event that an individual changes plans for the irrevocable trust. As a result, an individual loses control over assets once transferred to an irrevocable trust. An irrevocable trust also comes with certain tax considerations that may require more complicated IRS filing.
Irrevocable Trusts Allow Property Management By Outside Individuals
An irrevocable trust offers the opportunity for property to be managed by an outside individual or company, which can greatly decrease stressful situations for the individual who drafts the irrevocable trust. One of the situations in which this type of management device becomes beneficial is situations in which the individual becomes incapacitated.
Reasons Why Parties Decide To Use Irrevocable Trusts
There are two primary reasons why individuals decide to use irrevocable trusts: taxes and creditors.
“Revocable” trusts also keep assets outside of a probate estate, but these assets still remain subject to taxation and potential creditor claims, which may include nursing home, Medicaid, credit cards and divorcing spouses of the individuals creating a revocable trust. Any assets included in a revocable trust also remain part of a taxable estate. Irrevocable trusts, on the other hand, can help minimize an individual’s tax burden while maximizing the benefits to named beneficiaries.