If you’re thinking of creating an irrevocable trust to reduce estate taxes, protect your assets or provide security for your loved ones when you’re gone, it’s important to understand how this type of trust works.
Unlike a revocable trust, which you can change or dissolve at any time, an irrevocable trust is permanent. This means you cannot revoke an irrevocable trust or alter its terms at your pleasure, even if you’re the one who created it.
You won’t own or control the assets in the trust
Once you transfer assets to an irrevocable trust, they are no longer legally yours. They will belong to the trust, and the trustee you appoint will manage them according to the terms you’ve set. You cannot remove the assets from the trust or control how they are used, sold or invested.
This loss of ownership or control over your assets can be a bitter pill to swallow, but it’s what makes irrevocable tools powerful. Since the assets are no longer under your name, they’re generally protected from creditors and lawsuits. Additionally, they do not count as part of your taxable estate.
Your choice of trustee is crucial
Your trustee will be the one administering the trust. As such, you want someone capable and trustworthy. Think about whether you want a trusted family member, a professional fiduciary or even a financial institution to manage the trust. It’s a decision that can impact the effectiveness of the trust in your overall estate plan. You might also want to consider naming a successor trustee who would step in if your first choice can no longer serve.
Your objectives matter
There are several kinds of irrevocable trusts, each suited for specific goals. Knowing what you want to achieve will help you structure the trust correctly, whether it’s providing for a loved one with special needs or tying the distribution of trust proceeds to the beneficiaries’ life milestones.
Working with someone who understands the nuances of irrevocable trusts can help you make the most of these estate planning tools without unintended gaps or oversights.