Many vehicles currently exist to allow individuals to plan their estates in such a way as to transfer assets to benefactors without the need to go through time-consuming probate or expensive legal battles. One of the most effective is through the creation of an irrevocable trust, in which the grantor has no control over the assets within the trust and cannot dictate any of the decisions made regarding those assets. There are both advantages and disadvantages to this method of estate planning.
Unlike a revocable trust, which may interfere with certain benefits, an irrevocable trust may be established to supplement the income of the beneficiary. This becomes especially important if the beneficiary is a recipient of Medicaid, Social Security or any other type of government assistance. The supplemental income from an irrevocable trust does not reduce or limit the amount of benefits for which the individual is eligible. Likewise, the trust may be specifically written to care for minor children to provide for their educational expenses without limiting their prospects for various forms of financial aid. For those wishing to engage in philanthropic activities, the trust may be established to oversee specific subsidies and donations without incurring additional tax liabilities.
Reduction in Financial Responsibility
One of the greatest benefits of an irrevocable trust is the relief from financial liabilities on behalf of the transferrer. Upon finalization of the trust and the actual transfer of assets, the individual who established the trust is no longer responsible for the tax obligation of the assets held in that trust. Not only does this reduce the overall value of his personal assets, which greatly reduces his personal tax liability, but it will reduce the future tax obligation based on any earnings that may have been gained through the income generated from the assets. Additionally, these assets are protected from any court action should the individual seek legal protection under bankruptcy protection.
Immediate Loss of Assets
By finalizing an irrevocable trust, the transferring individual gives up complete control of the assets in question. He will not have any authority over the decisions regarding those assets, nor will he receive any of the income generated from of those assets in the future. Likewise, he is no longer liable for any losses or taxes owed. The decision is considered permanent and non-changeable under the law.
No Changes Can Be Made
As the name implies, once an irrevocable trust has been finalized, no changes are allowed to be made. This includes designating a new trustee in the event that issues arise between the transferrer and the trustee. Individuals must understand that the only way in which an irrevocable trust can be changed or terminated is through a binding court order. Such actions are lengthy and may prove counterproductive from a financial standpoint.
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