An irrevocable trust is an estate planning tool that has substantial tax benefits for both the creator of the trust and their beneficiaries. Irrevocable trusts have their benefits, but there are also important drawbacks to consider.
Chief among these drawbacks is the degree of difficulty that comes with altering or revoking these trusts. Unlike other forms of estate planning tools, irrevocable trusts can require court intervention in order to change their terms.
Understanding Irrevocable Trusts
Most states govern the use of irrevocable trusts by statute. In Florida, laws related to irrevocable trusts are found in Chapter 736 of the Florida Trust Code. It is helpful to think of these trusts as an agreement between the creator of the trust, their beneficiaries, and the trustee.
Once this agreement is created, the creator of the trust may not simply change their mind and revoke the trust or make changes to the list of beneficiaries. Once that individual has given over their property to an irrevocable trust, they lose their ownership rights to it forever.
One of the most basic benefits of an irrevocable trust is that it allows the beneficiaries to avoid probate. Probate court can be a long and costly ordeal, and avoiding it is usually in the best interest of every involved party.
These trusts also offer substantial asset protection and can reduce tax liability. By placing assets into a trust, the creator could lower their heirs’ future estate tax liability as these assets would no longer qualify.
Despite these significant benefits, the primary downside is that changing these trusts can be difficult. Life circumstances change, and many trustees or beneficiaries could come to regret the language written into these trusts.
Altering them can be difficult, even when all of the involved parties are on board.
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Revocable Versus Irrevocable Trusts
Irrevocable trusts differ from revocable trusts in some important ways. While both options allow for avoiding probate upon the trust creator’s death, they also differ substantially in how the terms of the trust are altered or revoked.
A Revocable Trust is Subject to Change
A revocable trust earns its name because the creator of the trust has the ability to make changes during the course of their life. These changes could include altering beneficiaries, removing assets, or even revoking the trust entirely.
An Irrevocable Trust Cannot be Altered
An irrevocable trust puts the assets of the trust creator out of reach forever. While there are circumstances that allow for the revocation or amendment of the trust, that typically requires court approval, as well as consent by the beneficiaries.
There are reasons to consider irrevocable trusts that make it worthwhile to give up the convenience of a revocable trust. These include additional options for asset protection or tax benefits.
What Are Spendthrift Protections?
Trusts are powerful tools for the estate planning process, especially when they include what is known as spendthrift provisions. According to the Legal Information Institute (LII), a spendthrift provision restricts the beneficiary’s ability to assign or transfer their future payments under the terms of the trust.
Spendthrift provisions were created in conjunction with irrevocable trusts for one important purpose: to prevent beneficiaries from squandering their future wealth by assigning it to third parties before they ever receive it.
That said, these provisions have taken on a new purpose, as they are frequently used to prevent a beneficiary’s creditors from reaching their inheritance while it is held by the irrevocable trust.
Courts have repeatedly found that since the terms of the trust do not allow the beneficiary to voluntarily transfer the future rights of the trust to another person, it makes little sense to allow creditors to involuntarily reach these assets.
The use of these provisions is an important part of the estate planning process for many people.
Talk to Our Team About the Benefits of an Irrevocable Trust
If you are still unsure what an irrevocable trust is or if it would benefit your estate plan to create one, an attorney could have the answers you need. At Bogin, Munns & Munns, we understand the nuance that goes into creating an irrevocable trust.
This includes not only drafting these trusts in a way that can help you benefit the most but also simplify the process, should you decide you need to revoke or modify the trust at a later date.
To discuss your options, call (407) 578-1334 for a consultation.
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