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All About Irrevocable Trusts

By: Julia Brown

What is an irrevocable trust and what are some of its benefits?


            Trusts can be thought of as similar to a company or corporation. A trust can own, manage, buy or sell property, and they also have specific rules determining how they have to operate. An irrevocable trust is one that the grantor (or creator or settlor) cannot revoke or change. Irrevocable trusts are generally set up for estate and tax considerations. Irrevocable trusts serve many benefits.  One of the first benefits worth mentioning is how they avoid estate taxes on the property in the trust. Estate taxes are a tax that can be charged to an individual’s assets when they pass away before it can be given to their descendants or those who will inherit said assets.


Grantors give up control (meaning legal ownership) of the assets they put into their irrevocable trusts, which causes the irrevocable trust to reduce the grantor’s estate taxes. They also eliminate the income generated by the trust assets from the grantor’s personal income. Since putting the assets in the trust removes all of the grantors’ ownership, it removes the trust’s assets from the grantor’s taxable estate upon their death, as well as relieves the grantor of the tax liability on the income generated by the assets. In addition, trust assets can be distributed to the beneficiaries (the individuals who are designated to receive income or assets in the trust) more easily and quickly.


Another benefit is that irrevocable trust assets are not required to go through probate. Probate is when the assets of a deceased person are distributed to the beneficiaries by a court. One doesn’t have to go through this lengthy and sometimes expensive process if They have an irrevocable trust. This provides quick access to the assets once the grantor is deceased.


What are the differences between irrevocable trusts and revocable trusts?


To start, revocable trusts do not offer the same protection against legal action or estate taxes as irrevocable trusts do. This is because, with the revocable trust, the liability of the trust falls on the shoulders of the grantor. If it is an irrevocable trust, the trust itself is responsible for paying the taxes. If a grantor of a revocable trust is sued, the assets in the revocable trust can be part of the settlement. An irrevocable trust is independent. Irrevocable trusts cannot be changed or altered the way that revocable trusts can be modified.


An irrevocable trust’s  terms cannot be changed without a court order. This protects the assets more than a revocable trust. The separation of the assets from the grantor allows him or her to become financially eligible to meet the requirements of government programs such as Medicaid, where you have to have only up to a certain income. Revocable trusts can last as long as you want, irrevocable trusts are permanent. The permanence of an irrevocable trust is beneficial in many ways such as providing strong asset protection, tax benefits, estate planning opportunities, and most importantly some peace of mind and long-term financial stability.


What are split interest trusts?


There are many different types of split-interest trusts. A split-interest trust is essentially just an irrevocable trust that has both charitable and non-charitable beneficiaries. There are two types of split-interest trusts, charitable lead trusts and charitable remainder trusts. With a charitable lead trust the donor makes an immediate income stream for charity and whatever is left in that trust passes to his or her heirs. With a charitable remainder trust it’s the opposite, it creates an income stream immediately for the donor or someone else that the donor designates, and whatever is left in the trust passes to charity.


These split-interest trusts can be beneficial for tax benefits such as minimizing estate and gift taxes, reducing income tax, and deferring capital gains. Now, why are these related to irrevocable trusts? Split-interest trusts and irrevocable trusts are structured the same way. This means once the grantor has established the split-interest trust, it cannot be revoked or changed. The key difference between the two is that split interests divide the beneficial interests in the assets between different beneficiaries.


Who controls an irrevocable trust? Can modifications ever be made?


The terms of an irrevocable trust are set by the grantor, but once established, control over the assets typically rests with the trustee named in the trust agreement, and the grantor (the person who establishes the trust) loses direct control over them. Often, the grantor and trustee may be the same person. Life changes frequently, so is an irrevocable trust flexible enough for that? Even though the future is unpredictable, you can build a set of instructions into your irrevocable trust that can be triggered if you need to modify the trust sometime in the future.


Irrevocable trust modification is less about undoing a trust you created a long time ago, and more about creating a trust that has provisions that allow for many types of modifications. This is why it is crucial to consult with an estate planning professional before setting up the trust. It is also crucial to understand that once the grantor has established the irrevocable trust, changes to trust terms must obtain consent from the trustee and beneficiaries. But what if you didn’t think ahead and want to modify an already existing trust?


In the state of Florida, you can first institute an action in court to have the court amend an irrevocable trust. The court will review your reasoning for modification and if it is persuasive and reasonable enough, then the court will be able to make those modifications. Florida law also permits non-judicial settlement agreements, which is when the trustee and beneficiaries consent and agree to modify certain parts of an irrevocable trust without court involvement.


Can a house with a mortgage be put in an irrevocable trust?


Yes, you can definitely transfer your mortgaged house to the irrevocable trust. You do not need to pay it off prior to transferring the property into the trust. The main benefit of transferring property into a trust is that it protects the property from being claimed by Medicaid in the case that you die owing money to the government for your medical expenses. Will this trigger the due-on-sale clause? This is a clause that states that if you transfer your real estate property to a new owner, the lender can make the entire loan due immediately. As long as the owner maintains the full and unrestricted right to live in that property for the rest of their life, it will not trigger the due-on-sale clause. That being said, you should consult with your mortgage company so that there is no confusion on their end. Putting a house in an irrevocable trust saves your loved ones from having to go through the court probate process to be able to have your house.


Final Considerations


Estate planning can be a difficult topic to think about; nobody likes to think about their own mortality. It can also be very complex with a lot of moving pieces related to what is best to reduce tax liability for your loved ones who will be inheriting your assets. Setting up the right estate plan for you will give you piece of mind that your family will be adequately provided for once you have passed on. It also makes financial matters much simpler for them at a time when they will be dealing with the emotional toll of your death.


What happens to your assets after you pass away, especially if you have a significant amount or have special needs loved ones that will need to be taken care of, is not something to be taken lightly. It is best to work with a qualified and experienced estate planning attorney to ensure that every factor is properly considered and taken care of. If you have any questions or need any help with setting up your estate plan, do not hesitate to contact the Law Firm of Gian-Franco Melendez, LLC to speak with an experienced estate planning attorney about your options.