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Irrevocable Trusts

Irrevocable TrustsAn irrevocable trust is a powerful estate planning tool that can provide individuals with significant control and protection over their assets, both during their lifetime and after their passing. Designed to be unchangeable once established, an irrevocable trust offers numerous advantages, such as minimizing estate taxes, shielding assets from creditors, and ensuring a smooth transfer of wealth to beneficiaries. At Klenk Law, we specialize in helping clients navigate the complexities of irrevocable trusts and craft personalized strategies that align with their unique goals and circumstances.

The experienced team of attorneys at Klenk Law recognizes the importance of comprehensive estate planning and the crucial role that irrevocable trusts play in securing financial legacies for future generations. With a deep understanding of trust laws and tax regulations, we offer expert guidance to individuals, families, and business owners seeking to establish irrevocable trusts as part of their estate planning portfolio. Whether you wish to protect your assets from potential creditors, safeguard your wealth for your loved ones, or optimize tax efficiency, our dedicated attorneys are here to provide tailored solutions that address your specific needs and ensure the preservation and transfer of your wealth in accordance with your wishes.

Irrevocable Trusts are essential to estate planning, asset protection, and tax avoidance planning. Once only a tool for the wealthy, Irrevocable Trusts, and the protection they provide, are now available to everyone. Because mastering their use take time, many estate planners do not use Irrevocable Trusts. Avoiding trusts as an estate planning tool is a mistake.  These flexible tools are a valuable part of almost everyone’s estate plan.

What is an Irrevocable Trust?

The Grantor created An Irrevocable Trust, making it impossible to “revoke” the Trust and bring the assets back into his name. This permanent status differs from a Revocable Trust. A Grantor may spontaneously cancel a Revocable Trust. Once the Grantor gives an asset to the Irrevocable Trust, the asset belongs to the Trust. At its most basic level, Asset Protection and Estate Planning with an Irrevocable Trust stem from this fact. If correctly drafted, a person can give assets to an Irrevocable Trust, and future creditors cannot take that asset. The Grantor no longer owns the asset; the Trust owns the asset.

How To Set up an Irrevocable Trust?

Each Irrevocable Trust must have a Grantor, who is the person who signs the Trust and brings it into existence. The Trust is only a piece of paper, so the trust terms must appoint an individual or entity who will implement the Trust’s terms. The Trustee implements the Trust terms. Once signed, the Grantor or other people may give the trust assets which the Trustee manages for the Beneficiaries.

What Are the Advantages of an Irrevocable Trust?

An Irrevocable Trust is a primary tool in most Asset Protection and Estate Plans. The trusts can own almost any asset while providing shelter from the Grantor’s and Beneficiary’s divorce, creditors, and legal problems. The Trust can help keep assets in the family, and if a jurisdiction like Pennsylvania or New Jersey has revoked the Rule Against Perpetuities, it can last forever. This flexible tool allows Grantors to provide benefits for generations. These valuable benefits arise because once the Grantor transfers ownership of an asset to the Trust, he has surrendered all incidents of ownership over that asset. It is the Trust’s asset now, not the Grantor’s. The transfer can also remove the asset from the Grantor’s taxable estate, avoiding death taxes and shifting the income tax burden away from the Grantor.

Benefits Of An Irrevocable Trust

An irrevocable trust offers several key benefits that make it a popular choice for individuals looking to protect and manage their assets effectively:

  1. Asset Protection: One of the primary advantages of an irrevocable trust is its ability to provide robust asset protection. By transferring assets into the trust, they are no longer considered part of your personal estate. As a result, these assets are shielded from potential creditors, lawsuits, and other legal claims. This protection ensures that your assets are preserved for the intended beneficiaries, even in the face of financial challenges or unforeseen circumstances.
  2. Tax Efficiency: Irrevocable trusts offer various tax planning opportunities to minimize estate taxes, gift taxes, and generation-skipping transfer taxes. By transferring assets to an irrevocable trust, you can potentially reduce your taxable estate, ultimately maximizing the wealth available for distribution to your beneficiaries. Additionally, certain types of irrevocable trusts, such as Grantor Retained Annuity Trusts (GRATs) and Qualified Personal Residence Trusts (QPRTs), can further optimize tax savings by leveraging specific provisions of the tax code.
  3. Control and Flexibility: Although the term “irrevocable” suggests a lack of control, there are still ways to maintain a certain level of influence over the trust assets. Through careful drafting, you can define specific terms and conditions within the trust document, such as how the assets are invested, when distributions are made, and who the beneficiaries are. This allows you to exert control over the distribution and management of your assets even after they have been transferred to the trust.
  4. Probate Avoidance: Assets held in an irrevocable trust are typically not subject to probate proceedings, which can be time-consuming, expensive, and subject to public scrutiny. By avoiding probate, the assets can be transferred smoothly and privately to the intended beneficiaries, minimizing administrative hassles and potential disputes.
  5. Medicaid Planning: For individuals concerned about long-term care and Medicaid eligibility, an irrevocable trust can be a valuable tool. By transferring assets to an irrevocable trust well in advance of needing Medicaid benefits, you can effectively “spend down” your assets while still ensuring their protection for the benefit of your heirs.

An irrevocable trust provides a robust framework for asset protection, tax planning, and control over your wealth, allowing you to preserve and distribute your assets according to your wishes while minimizing potential liabilities and maximizing the benefits for your beneficiaries.

What Is a Trust Reformation?

Though a trust might be an Irrevocable Trust, the facts and circumstances might allow for modification. A Trust Reformation refers to the process of changing an Irrevocable Trust. Learn More HERE.

Types of Irrevocable Trusts

There is no “one size fits all” Irrevocable Trust. Irrevocable Trusts are flexible tools not subject to easy modification. I would be happy to discuss your circumstances and brainstorm with you about what Trust best fits your needs. Below is a list of some of the Irrevocable Trusts we regularly use, with a link to more detailed information on each.

  • Spousal Lifetime Access Trust (SLAT): A SLAT is an Irrevocable Trust used typically by married couples to provide asset protection and tax planning for a spouse and descendants.
  • Irrevocable Life Insurance Trust (ILIT): An ILIT is an Irrevocable Trust used to remove life insurance from the Grantor’s probate and taxable estate.
  • Disclaimer Trust: Usually used in a Will, a Disclaimer Trust refers to a protective trust for a surviving spouse funded with assets that the surviving spouse could have taken outright but instead “disclaimed.” The Will’s terms then dictate that these disclaimed assets pour into the “Disclaimer Trust.”
  • Dynasty Trust: A Dynasty Trust is designed to last forever, sheltering assets from generation to generation from divorce, lawsuits, and various taxes. Typically these trusts are used by clients who wish assets to remain within and benefit only their descendants.
  • Grantor Trust: or “Intentionally Defective Grantor Trust” is an Irrevocable Trust technique where the Grantor has given away the asset to the Trust, but the Grantor still pays the income taxes due on the trust assets. This shifting of income tax burden allows the Grantor to make an additional gift to the Trust each year, but the IRS views it as a penalty, not a gift.
  • Grantor Retained Annuity Trust (GRAT): GRAT planning involves the Grantor giving assets to an Irrevocable Trust but getting back an annuity. Typically done to shift assets to descendants, the goal is to transfer assets without triggering Gift Tax recognition.
  • Qualified Domestic Trust (QDOT): Used when one spouse is not a US citizen. The QDOT allows the US Citizen spouse to leave assets for the non-citizen spouse’s care without triggering taxes.
  • Qualified Personal Resident Trust (QPRT): Parents often use a QPRT to transfer a home to descendants at a low gift tax value. The Grantor gives the house to the Irrevocable Trust but receives back the right to the home’s rent-free use.
  • Education Trusts: Education Trusts distribute assets to or for the beneficiaries’ education.  A typical example is a trust for grandchildren to pay for College tuition.
  • Charitable Remainder Annuity Trust (CRAT): A CRAT is an Irrevocable Trust used in charitable estate planning where the Grantor gives the Irrevocable Trust an asset but receives back a fixed annuity payment.
  • Charitable Remainder Uni Trust (CRUT): A CRUT is an Irrevocable Trust used in charitable estate planning where the Grantor gives the Irrevocable Trust an asset but receives back an annuity payment that is tied to the asset’s fair market value rather than a fixed annual amount.
  • UniTrust: A UniTrust refers to an Irrevocable Trust that distributes assets to the beneficiary based on a percentage of the net assets in the Trust on a given date. Rather than providing the beneficiary “all income,” which can vary from year to year or even be zero, a UniTrust provides the beneficiary with an amount every year, even if there is no income.
  • Bypass Trust: A Bypass Trust is a technique that shelters the first spouse’s estate tax exemption. Typically the surviving spouse has access to the funds, but at the surviving spouse’s death, the remaining assets “bypass” that spouse’s estate and pass estate tax-free for descendants.
  • Credit Shelter Trust: A Credit Shelter Trust is a technique designed to shelter the deceased spouse’s estate, and generation-skipping tax exemption. Typically, the surviving spouse has access to the trust funds, but at the surviving spouse’s death, the remaining assets pass to descendants free of estate and generation-skipping taxes.
  • Marital Trusts: A Marital Trust is typically used along with a Bypass or Credit Shelter Trust to hold the portion of the deceased spouse’s assets that exceed the death tax credit. The assets are kept for the surviving spouse, sheltered from creditors or future spouses but are part of that spouse’s taxable estate. If appropriately drafted, the Trust qualifies as part of the “Marital” exemption, hence the name.
  • AB Trust: An AB Trust or AB Trust is a combination of a Credit Shelter Trust (the “A” Trust) and a Marital Trust (the “B” Trust). Married couples use these trusts to shelter the deceased spouse’s assets in protective trusts but keep the tax-exempt assets separate from those not tax-exempt at the first spouse’s death.
  • Pet Trust: A pet trust is called an animal trust under Pennsylvania statutes. The Trust allows you to plan for the care of your pet if you pass away. The Trust also covers pets that may be in gestation at your death. By creating a trust for your pet, you ensure they maintain as close to everyday life as possible.

Advising and Representing Trustees

Trustees of Irrevocable Trusts owe beneficiaries a fiduciary duty. Suppose the beneficiaries believe any action the Trustee took has harmed them. In that case, they can petition the court to review any actions seeking to surcharge the Trustee. If surcharged, the Trustee must pay the damages from the Trustee’s funds.

Why a Trustee Needs a Lawyer

Almost every Irrevocable Trust allows the Trustee to hire a lawyer to advise and represent the Trustee. Professional Trustees retain in-house attorneys for this purpose and then supplement these attorneys with outside Estate Litigation Lawyers. Professional Trustees seek legal help because professional Trustees know this is a wise decision. Sound, legal advice from experienced Trust Lawyers helps avoid conflict and minimize the chances of litigation. Further, it helps reduce the possibility that the Trustee will make a mistake, causing personal liability.

For more information, go to our Estate Litigation page to learn more about:

Typical Estate Questions About Irrevocable Trusts:

Here are some common questions clients, beneficiaries, and Trustees ask:

Do I need a Trust?

While an Irrevocable Trust is never a legal requirement, they have many advantages. Carefully analyzing your assets, goals, and heirs’ needs is the only way to judge if a trust is right for you.

Can I use a Life Insurance Policy for a Trust?

Irrevocable Life Insurance Trusts, or ILITs, are designed to hold life insurance. Life insurance is a flexible estate planning tool that can be used with many Irrevocable Trusts. For example, an excellent plan for avoiding conflict in a Second Marriage or Blended Family is purchasing life insurance to fund trusts so your spouse and children from prior relationships can part on good terms. Further, life insurance in Irrevocable Trusts is often a critical component in Business Succession Planning.

Is it expensive to have a bank or trust company be a Trustee of a Trust?

A “Corporate Trustee” is a bank or trust company serving as Trustee. Corporate Trustees have fee schedules available on request. Typically, the Corporate Trustee charges a percentage of the Trust’s assets’ fair market value, such as 1.5%. For more information, see our section on Fiduciary Fees. When you ask if the cost is expensive, you must balance the need for a Corporate Trustee with the services provided. A Corporate Trustee is an excellent alternative if no family member is qualified.

Further, an interested person can constantly challenge a fee and have the court review fees. See Fee Disputes. Always balance a Corporate Trustee’s power by appointing a responsible Protector team.

What is a Protector?

In a Trust, a Protector oversees the Trustee. A Trust Protector typically has the power to remove and replace the Trustee without court approval.

What are the advantages of having a Trust Protector?

An Irrevocable Trust is, Irrevocable. If you appoint a person or institution as Trustee and later regret that decision, your options to remove and replace that Trustee are limited and expensive. If you include a Protector in the Trust:

  • To avoid removal, Trustees return calls quickly.
  • If the Trustee becomes incapacitated, inattentive, involved in a dispute with a beneficiary, or otherwise problematic, the Protector removes the Trustee quickly and inexpensively.
  • The Protector can act as a form of communication between a Trustee and beneficiaries avoiding needless litigation.
  • The threat of being removed prompts the ready sharing of documents.
  • The Protector can have other powers which allow them to address changes in the law, circumstances, and the tax code.

How are banks paid to be Trustees?

Banks and Trusts companies typically charge a percentage of the Trust’s value yearly. Corporate Trustees provide these fee schedules on request and sometimes publish them on websites. For more information, see our Fiduciary Fees article.

Who pays the bank after I am dead to be a Trustee of the Trust?

Once the bank assumes the trusteeship, they can pay themselves from trust assets. The Trust should balance the bank’s power by appointing a strong Protector team. Learn more about bank trustee fees in our Fiduciary Fees article.

What happens if the person I leave something to in an Irrevocable Trust dies before me?

A well-drafted Irrevocable Trust clearly states where assets pass when a beneficiary dies. A good Estate Planning Lawyer asks you what result you wish and drafts the Trust accordingly.

For example, suppose a Bucks County, Pennsylvania client wants me to form an Irrevocable Third Person Special Needs Trust for her grandson in Atlantic County, New Jersey. In that case, I will ask her what should happen to any unused funds at the grandson’s death. She may say any such funds should pass to charity or perhaps in other Trusts to her other grandchildren in Philadelphia. Whatever her wish, I will then incorporate those terms into the Trust. At the grandson’s death, the Trustee follows the Trust’s terms.

What is an Irrevocable Living Trust?

There is no such thing as an Irrevocable Living Trust. This is a combination of Revocable Living Trust and Irrevocable Trust. The Grantor may easily modify or revoke a “Living Trust.” To learn more about Revocable Living Trusts, see my articles.

What is a Revocable vs. Irrevocable Trust?

Simply put, the Grantor cannot revoke an Irrevocable Trust; he can rescind a Revocable Trust. These two trust groups have different Estate Planning and Asset Protection purposes.

Irrevocable Trust Medicaid Planning

An Irrevocable Trust can be helpful for Medicaid Planning. In short, the Grantor can form a trust, transfer assets into the Trust and then wait out the Medicaid look-back period. Once passed, the Grantor can apply for Medicaid while the property remains safely in the Irrevocable Trust, sheltered from children’s divorce and creditors. Using Irrevocable Trusts in Medicaid planning is complex. Only attempt such planning after a thorough Estate Planning Lawyer’s analysis.

What does Irrevocable Mean?

Irrevocable, meaning no easy revocation.  The Grantor cannot shut it down.

What is a Trust Beneficiary?

A Trust Beneficiary is a person or entity entitled to benefit from a trust.

For example, if a Philadelphia resident executed an Irrevocable Trust naming his brother, also a Philadelphia resident, as Trustee with instructions to give ½ the income generated each year to a nephew and ½ to his church, the nephew and church would be the Beneficiaries of the Philadelphia situs Trust.

What is a Trust Contingent Beneficiary?

A Contingent Beneficiary is a person or entity entitled to benefit from a trust, dependent on a contingency.

For example, if Uncle Bob executed an Irrevocable Trust naming his brother as Trustee with instructions to give $10,000 each year to a nephew. At the nephew’s death, the remainder passes to Uncle Bob’s church. The church is the contingent beneficiary. The church receives the trust funds contingent on anything remaining at the nephew’s death.

Key Differences Between A Revocable Trust And An Irrevocable Trust

A revocable trust, also known as a living trust, is a flexible estate planning tool that allows individuals to retain control over their assets during their lifetime while providing for the efficient transfer of those assets after their passing. Here are some key characteristics of a revocable trust:

  1. Flexibility and Control: With a revocable trust, the individual creating the trust, known as the grantor, can make changes to the trust’s terms, amend or revoke the trust altogether, and retain control over the assets held within the trust. The grantor can act as both the trustee and the beneficiary of the trust, managing and utilizing the assets as they see fit.
  2. Probate Avoidance: One of the primary benefits of a revocable trust is its ability to bypass the probate process. Upon the grantor’s death, the trust assets can be smoothly and privately transferred to the designated beneficiaries without the need for probate court involvement. This streamlines the distribution process and helps maintain privacy.
  3. No Asset Protection: Unlike an irrevocable trust, a revocable trust does not provide asset protection. Since the grantor retains control and ownership of the assets, they remain vulnerable to potential creditors, lawsuits, and other claims.

Irrevocable Trust:

An irrevocable trust, as the name suggests, is a trust that cannot be modified or revoked once it is established, except under limited circumstances. It is designed to provide greater asset protection, tax benefits, and long-term planning advantages. Here are some key characteristics of an irrevocable trust:

  1. Asset Protection: One of the primary advantages of an irrevocable trust is its ability to shield assets from creditors, lawsuits, and potential claims. Once assets are transferred to the trust, they are no longer considered part of the grantor’s personal estate and are protected from these risks.
  2. Tax Planning Opportunities: Irrevocable trusts offer various tax planning benefits. By transferring assets to an irrevocable trust, the grantor can potentially reduce estate taxes, gift taxes, and generation-skipping transfer taxes. Certain types of irrevocable trusts, such as Qualified Personal Residence Trusts (QPRTs) and Irrevocable Life Insurance Trusts (ILITs), can provide specific tax advantages.
  3. Limited Control: Unlike a revocable trust, the grantor of an irrevocable trust typically gives up control over the assets placed in the trust. A designated trustee manages the trust assets and carries out the terms outlined in the trust document. However, the grantor can still include specific instructions and guidelines to influence the trust’s administration and distribution.
  4. Medicaid Planning: Irrevocable trusts can be utilized for Medicaid planning purposes. By transferring assets to an irrevocable trust within the appropriate time frame, individuals can potentially protect their assets from being counted towards Medicaid eligibility requirements while still ensuring their availability for the benefit of their heirs.

While both revocable and irrevocable trusts are valuable estate planning tools, they differ in terms of flexibility, control, asset protection, and tax planning advantages. Revocable trusts offer more control and flexibility during the grantor’s lifetime, while irrevocable trusts provide stronger asset protection, tax benefits, and long-term planning opportunities. It’s essential to consult with an experienced estate planning attorney to determine which type of trust best suits your specific needs and goals.

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If you have any questions about Irrevocable Trusts or other estate planning topics, please get in touch with our office to schedule a free consultation. Klenk Law has focused only on Estate Law for more than two decades. We’ve seen it all, and this experience allows us to explain complex estate planning techniques clearly and concisely. We make it easy for you to understand Irrevocable Trusts and Estate Planning.  You can then make the best decisions for yourself and your family.

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