The decision to place your money and assets into an irrevocable trust is a serious one. That's because you will not be able to modify, change or revoke your irrevocable trust after you have created and funded it.
The assets will be managed the way you've instructed the trust to handle them, and they will benefit the parties you've identified as beneficiaries. However, once your assets are inside the trust, they will not belong to you anymore.
Why would someone want an irrevocable trust?
The finality of an irrevocable trust is enough to dissuade many trust grantors from creating one. However, there are incredible benefits that come with these trusts -- benefits that might be enough to make you want to create one yourself.
The primary benefits of irrevocable trusts relate to (1) tax savings and (2) creditor protection. Let's take a look at both of these benefits in further detail.
1. Protection from creditors and lawsuits
If you've taken out a large loan, or you work in a business that could result in lawsuits being brought against you, an irrevocable trust can protect your assets.
Imagine a judge rules that you need to pay a $1,000,000 judgment. If you've secured your assets inside an irrevocable trust, those assets can't be removed by you and they can't be removed by the court for something you did. Similarly, imagine you've taken out a large business loan and now you can't pay the payments. The bank that issued the loan won't be able to go after money in your irrevocable trust.
2. Protection from estate taxes
Imagine you have more than $5.6 million in your estate. This figure is the 2018 estate and gift tax exemption. If you bequeath more than $5.6 million to your heirs, it could leave your estate vulnerable to a 40 percent federal tax on any amount that exceeds the $5.6 million exemption.
However, if you put a portion of your estate into an irrevocable trust, you can transfer this wealth to your named beneficiary without triggering estate taxes. Again, the assets you place inside an irrevocable trust don't belong to you anymore. As such, the IRS cannot tax this money as a part of your estate.
Do you think your family could benefit from an irrevocable trust?
An irrevocable trust is not for everyone, and you might be able to take other measures to protect your assets in a way that better suits your situation. However, for people it can benefit, an irrevocable trust could be just the estate planning solution they are looking for. If you think you and your family could benefit from an irrevocable trust, consider all your legal options before moving forward with your plans.