Published on: 12/22/2023
How Does an Irrevocable Trust Protect Assets?
In the realm of estate planning and wealth preservation, irrevocable trusts are one of many powerful tools designed to shield assets from a number of common threats, but how does an irrevocable trust protect assets?
By taking on the increased risk associated with irrevocable trusts, you can work to secure a level of protection for your assets that goes beyond the typical safeguards offered by revocable trusts.
With the greatest wealth transfer in history taking place, more and more high-net-worth individuals are beginning to formalize their estate planning with the goal of leaving a legacy in mind. If you are a high-net-worth executive, individual, or business owner looking to plan for your future and secure your legacy, schedule a conversation with Avidian today to get started.
How do irrevocable trusts work?
Irrevocable trusts are one of two types of trusts and are generally set up for estate planning or tax planning purposes. Within the framework of an irrevocable trust, the grantor essentially gives up control over their assets as once they are transferred into the trust, they cannot be taken back.
There are several types of irrevocable trusts including:
- Irrevocable Life Insurance Trusts (ILITs): used to hold life insurance policies and remove the death benefit from the grantor’s taxable estate. This can help minimize estate taxes for beneficiaries.
- Grantor Retained Annuity Trusts (GRATs): allow the grantor to transfer assets into the trust while receiving an annuity payment for a set number of years. This can help minimize gift and estate taxes.
- Qualified Personal Residence Trusts (QPRTs): used to transfer ownership of a primary residence or vacation home into an irrevocable trust and allow the grantor to continue living in the property for a set period of time. This can help remove the property from the grantor’s taxable estate.
- Charitable Trusts: allows the grantor to make a charitable contribution while still retaining some control over the assets. This can have tax benefits for both the grantor and the charity.
The purpose of this inflexible framework is that once the grantor no longer has ownership of their assets, they can avoid incurring estate taxes on those assets and they are unreachable by creditors, but how does an irrevocable trust protect assets?
What is the greatest advantage of an irrevocable trust?
Irrevocable trusts are an incredibly powerful tool for high-net-worth individuals looking for asset protection. Some of the benefits an irrevocable trust can offer include:
- They minimize the burden of estate taxes. Worried about the estate and inheritance tax in Texas? Because assets transferred to an irrevocable trust are no longer a part of the grantor’s taxable estate, assets can generally be passed down without being subjected to estate taxes.
- They can help protect assets from lawsuits. Because assets transferred into an irrevocable trust are legally separated from the grantor, irrevocable trusts can offer protection in the event of any legal battles or unforeseen circumstances that threaten those assets.*
- They can help retirees qualify for Medicaid benefits by ensuring that they don’t exceed income or asset limitations. Trusts can help shelter assets so that retirees don’t exceed limitations and lose out on important benefits.
- They can prevent beneficiaries from misusing the assets. If your beneficiaries aren’t quite ready to take the reins, you can set specific and enforceable conditions for the release of the assets to them.
Keep in mind that in order to reap any of these benefits from an irrevocable trust the grantor must appoint a neutral trustee who will have the power to overrule decisions made by the grantor about assets placed in the trust.
*Continue reading about asset protection trusts.
What is the downside of an irrevocable trust?
While irrevocable trusts can provide significant protection for your assets against taxation, they also come with risks. It may seem obvious, but the most serious danger of irrevocable trust use is their irrevocable nature.
Once you’ve decided which assets to put into an irrevocable trust, the beneficiaries that will receive those assets, and the terms on which they will receive them, you cannot change things. In order to make changes to your assets or their distributions you will need trustee and beneficiary consent, which isn’t always easy to come by.
Additionally, setting up an irrevocable trust and arranging for its ongoing management can be very costly. Irrevocable trusts might be a great option for the protection of your assets and planning of your estate, but depending on the circumstances the risks might also outweigh the rewards.
What happens to an irrevocable trust when the grantor dies?
What happens when the grantor of a trust dies depends on the type of trust and the terms of the distribution of its assets, but generally, the trust continues to exist until the trustee distributes all of the assets it contains.
This is why it is so essential to appoint a trustee whom you trust entirely — and ideally why your trustee would be involved with the planning of your estate and the safe transfer of your multigenerational wealth.
Who owns the property in an irrevocable trust?
Who controls the money in an irrevocable trust? The purpose of an irrevocable trust is to remove ownership of assets from a grantor. This is why, although the grantor is the one who put their assets into the irrevocable trust, once their assets are contained therein, they no longer own them.
The assets in an irrevocable trust are owned by the trust. Legally, a trust acts as an individual person, and can therefore possess the assets until the terms of the trust are satisfied and assets are transferred to the beneficiaries.
Can a grantor receive income from an irrevocable trust?
Some forms of irrevocable trusts, such as a grantor-retained annuity trust (GRAT), do allow grantors to receive a set income stream from the trust.
Using a GRAT, you may transfer assets into the trust — which will still allow you to transfer assets to your beneficiaries without being subject to gift and inheritance taxes — with the intention of receiving annuity payments based on the value of those assets.
When setting up a GRAT, you must specify the terms of the annuity payments and can opt to “zero out” the GRAT by setting those payments so that their interest will cover the estate taxes that would otherwise be passed to your beneficiaries.
Continue reading about the Texas gift tax.
Interested in using a trust to pass down your wealth? Avidian Wealth Solutions can help.
To review, how does an irrevocable trust protect assets? It can minimize the burden of estate taxes, protect your assets from lawsuits, and potentially help you qualify for important Medicaid and Social Security benefits that you might otherwise exceed income limits for.
Whether you’re interested in protecting elderly parents’ assets or are curious about building a legacy for generations to come, the estate planning professionals at Avidian are here to help. Avidian offers a suite of personalized financial solutions, including estate planning in Houston, Austin, Sugar Land, and The Woodlands.
We don’t do one-size-fits-all — our multidisciplinary team of financial professionals crafts financial solutions for your specific needs and goals. Schedule a consultation with us today to learn more about how our team can help you.
More Helpful Articles by Avidian Wealth Solutions:
- 4 Tips For Guarding Your Nest Egg From Inflation
- What Does a Private Wealth Manager Do in Austin?
- What Are RMDs?
- Your End-of-Year Tax Planning Checklist
- What is the Repatriation Tax in the US?
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