Estate planning often involves various instruments to manage and protect assets, including irrevocable trusts. Unlike its more flexible counterpart, the revocable trust, an irrevocable trust has terms that can’t easily be changed once established.
Irrevocable trusts are often established to minimize estate taxes or protect assets from creditors. Because they can’t easily be modified or terminated, the assets in these trusts no longer belong to you once you transfer them. This can be a benefit and a limitation.
Estate tax advantages
One of the primary benefits of an irrevocable trust is its impact on estate taxes. Assets transferred into the trust are removed from your taxable estate. This can significantly reduce or eliminate federal estate taxes upon your death, ensuring that more wealth is passed on to your beneficiaries rather than paid to the government.
Asset protection features
Another advantage of using an irrevocable trust is its ability to protect assets from creditors. Since you no longer own the assets you transfer into the trust, creditors can’t easily reach them. This can be particularly beneficial for people who work in professions with a high risk of litigation.
Impact on Medicaid eligibility
In some situations, people set up irrevocable trusts to become eligible for Medicaid, the government program that provides healthcare benefits to low-income individuals. By transferring assets into an irrevocable trust, you may reduce your available resources, thereby meeting the eligibility requirements for Medicaid. However, it’s essential to understand the look-back period and potential penalties involved.
Creating a trust that can only be altered by the consent of beneficiaries and/or a court order isn’t the most straightforward approach one can employ when estate planning. However, this opportunity can significantly benefit you and your legacy under certain circumstances. Seeking legal guidance when moving forward in your estate planning journey can be helpful.