Houston Estate Planning and Probate Blog

Wednesday, November 1, 2017

A Primer on Irrevocable Trusts

A Will is one way to plan for the distribution of your assets after death, however, a comprehensive estate plan also considers other objectives such as planning for asset protection and long-term care. Therefore, you should consider utilizing an irrevocable trust.

An irrevocable trust as a planning tool becomes effective during a person's lifetime, but it cannot be amended or modified. The person creating the trust is the grantor and the grantor transfers property into the trust permanently. By transferring the property, the grantor no longer owns the property, and a designated trustee owns and manages the property for the benefit of the beneficiaries.

Irrevocable trusts provide a number of advantages. For example, the property is not subject to estate taxes because the grantor no longer owns it; unlike a Will, an irrevocable trust is not subject to probate in the court after the Grantor dies; and the assets in the trust are protected from creditors.

The following are common Irrevocable Trusts:

  • Bypass Trusts - utilized by married couples to reduce estate taxes upon the death of the second spouse. The deceased spouse's 1/2 interest in community property and all of their separate property interest up to the Unified Credit is transferred into the trust for the benefit of the surviving spouse. Because the surviving spouse does not own the property but is only a beneficiary, the property does not become part of surviving spouse's estate when he or she dies.

  • Charitable Trusts - created to reduce income and estate taxes through a combination of gifting and charitable donations.  A charitable remainder trust transfers property into a trust with named beneficiaries for a specific time period at which time a named charity is the final beneficiary.

  • Life Insurance Trusts - ownership of a life insurance policy is transferred into the trust and the trust becomes the beneficiary of the policy. Insurance therefore passes outside of the deceased's estate and is not added to the value of the estate for tax purposes, minimizing estate taxes.

  • Spendthrift Trusts – designed to protect beneficiaries from creditors and predators and protect those beneficiaries who may not be able to manage finances on their own. A Trustee is named to manage and distribute the funds to the beneficiary according to the terms of the trust.

  • Special Needs Trusts or Supplemental Needs Trusts- designed to protect the public benefits that many special needs individuals receive. Since an inheritance could disqualify a beneficiary from Medicaid, for example, this estate planning tool provides money for additional day to day expenses while preserving the governmental benefits.

The Takeaway

Irrevocable trusts are an estate planning tools that can protect an individual's assets, minimize taxes, and provide for your beneficiaries. In the end, these objectives can be accomplished with the advice and counsel of an experienced estate planning attorney.


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