An Irrevocable Trust is an estate planning entity, which you can create both during your lifetime or through your Will. While there are many similarities to a Revocable Trust (after all, both entities are a Trust), there are key differences between an Irrevocable Trust and a Revocable Trust.
A significant feature of an Irrevocable Trust is that by transferring an asset to such a trust, you can remove that asset from your taxable estate. This may be a desirable feature if your goal is to remove your assets from the reach of creditors or from your estate for estate tax purposes. To achieve those goals, it is important that you as the creator of the Trust do not retain any beneficial interest in the Trust. On the most basic level, this means a grantor cannot also be the beneficiary of the Trust. But it even means that the creator of the Trust cannot benefit from the Trust indirectly. Additionally, it may also not be advisable for the grantor to be the trustee of the Trust, unless the grantor-trustee’s powers are significantly limited. Furthermore, as the name of this type of Trust suggests, typically an Irrevocable Trust cannot be revoked (at least not without employing sophisticated estate planning features, and even then only under limited circumstances). As can be seen, many of the very features that make a Revocable Trust desirable for many individuals are unavailable in an Irrevocable Trust. On the other hand, if the grantor can live with the limitations of an Irrevocable Trust, its advantages (compared to a Revocable Trust) can be significant: enhanced creditor protection and ability to reduce your taxable estate.
As discussed elsewhere on this site, Medicaid is essentially a creditor; and as is the case with other creditors, effective Medicaid Planning may involve the use of an Irrevocable Medicaid Asset Protection Trust.
Lifetime (or Living or Inter Vivos) Trusts versus Testamentary Trusts
If you create a Trust during your lifetime, this type of Trust is called a lifetime Trust or Inter Vivos Trust. As discussed elsewhere on this site, you can create both a Revocable Trust and an Irrevocable Trust during your lifetime. One reason to create a lifetime or Inter-Vivos Trust is to remove (or protect) your asset(s) from probate. Another reason may be that you wish to protect your assets against your creditors or to do Medicaid Planning.IP
Funding Your Trusts
In order for a Revocable or an Irrevocable Trust to own your assets during your lifetime, you need to transfer your assets to the Trust. The funding of your Trust is particularly important if your goal is to avoid/minimize probate, to engage in asset protection or to reduce your taxable estate. Depending on the type of asset, different methods are required to transfer an asset to your Trust. For example, if you wish to transfer your house or condominium apartment to a Trust, you will need a new deed. If you want to transfer money to the Trust, the trustee would need to open a trust account to which you could transfer the money. If you would like to transfer your business holdings/interests to your Trust, you will need to prepare assignments or other corporate documents that effectuate and reflect the transfer of your business holdings/interests to your Trust (and also the business tax returns should reflect those transfers).
Let’s look at an example: a client, after consultation with Abraham Mazloumi & Associates, decides to transfer his brokerage account to the trustee of a revocable Trust, so that the trustee (which likely would be the client himself) can manage the brokerage account for the benefit of the client and/or the client’s family. Because the client transfers the brokerage account to the Trust during his lifetime, one of the benefits of the Trust (or a primary benefit, depending on your circumstances) would be that the brokerage account would avoid probate. As a result, the trustee can immediately start managing or distributing the trust assets (based on the trust’s instruction), without having to go to the Surrogate’s court. Another benefit is that in case of the client’s disability, the pre-selected successor Trustee could swiftly take over the responsibilities of managing the Trust’s assets without the need for court intervention. The trustee would manage the brokerage account, until the trustee makes distributions to the beneficiaries based on the instructions or parameters mandated by the client. For example, the client may have instructed the trustee to not make any distributions to the Trust’s beneficiaries until they attain a certain age or until they graduate from college. These types of parameters cannot be imposed with a power of attorney.
At Abraham Mazloumi & Associates, we not only help you create your Trust — we also assist you with funding it.
