Why would you need an Irrevocable Trust?
There are usually one of three reasons for creating an Irrevocable Trust:
- You are concerned about paying estate tax upon death;
- You are concerned about creditors (including Medicaid) during life and want protection; or
- You want to give assets to a third party but do not want them to have outright use of those assets.
See also: Domestic Asset Protection Trust – Ohio Legacy Trust, Medicaid Trust, and Intentionally Defective Grantor Trust (IDGT)
Is it irrevocable or revocable?
As the name suggests, an Irrevocable Trust is irrevocable, meaning it cannot be changed once it is created. But there are circumstances where modifications are possible even though the trust is irrevocable. This could be using a Trust Protector (also known as a Trust Advisor), decanting, reformation (judicial or nonjudicial), Private Settlement Agreement, or as otherwise permitted by state law.
Is a separate tax identification required?
In this case, it depends. An Irrevocable Trust can require its own tax identification number. It is also possible for an Irrevocable Trust to use the social security number of its creator(s) as the identification number. But upon death, a social security number can no longer be used. Whether a tax ID is necessary is a highly technical facts and circumstances analysis, which would be completed with your tax advisor.
Can you be your own Trustee?
While it is possible to be your own Trustee, it is rarely beneficial to do so. In most cases, you would appoint a third party to serve as the Trustee.
Is a gift tax return required?
It depends on the structure of the Irrevocable Trust. Sometimes, you will have a trust that constitutes a completed gift (thus, a gift tax return is required). In other cases, the Irrevocable Trust will own assets as an “incomplete gift,” which means a gift tax return is not required. See also: Intentionally Defective Grantor Trust (IDGT)
Is this subject to estate tax upon my death?
It depends. If the Irrevocable Trust were created to avoid estate tax inclusion, then it would not be in your taxable estate. For Irrevocable Trusts created for reasons other than minimizing estate tax, they would likely be included in your taxable estate (based on the asset level at death, hopefully, no estate tax would be owed).
Is there creditor protection?
Yes, there can be creditor protection with an Irrevocable Trust. The level of protection will depend on the terms of the trust. Generally, the more access a beneficiary has to assets, the less protection they would receive from creditors.
What assets can be placed in this type of Trust?
The Irrevocable Trust can own almost any type of asset. The one asset it cannot own is a retirement account. You would not want to place any retirement accounts into the Irrevocable Trust because doing so would trigger taxes and potential penalties.
How does it work?
An Irrevocable Trust can be created during your life for your benefit or the benefit of others (or both). If you have a Revocable Living Trust, upon the death of its creator(s), the RLT becomes an Irrevocable Trust. See also: Domestic Asset Protection Trust – Ohio Legacy Trust, Medicaid Trust, and Intentionally Defective Grantor Trust (IDGT)
Contact Trust Attorney Chris Diedling today to schedule a consultation and learn more about how we can help you with your estate planning needs.