An irrevocable trust is an estate planning tool that can help safeguard your assets, plan for healthcare or long-term care costs and minimize the tax burden on your estate. That said, it comes with certain compromises.
Think of it as a give-and-take. To enjoy the full benefits of an irrevocable trust, you must make some concessions, and it’s important to understand what you’re giving up before creating this kind of trust.
You lose direct control over the assets in the trust
Once you transfer your assets into an irrevocable trust, they no longer belong to you in the traditional sense. You may retain certain beneficial interests, such as income or the right to live in a home, but you don’t have direct control over trust assets. As such, you cannot unilaterally sell or transfer them to third parties as you would with your other assets.
You cannot alter or revoke the trust at will
An irrevocable trust is established to be permanent. You generally cannot change the terms, remove assets or dissolve the trust at your pleasure. Even minor adjustments typically require court approval or agreement from all beneficiaries, a process that can be complex and time-consuming. This lack of flexibility is something to consider if you want to avoid unpleasant surprises down the road.
It reduces your lifetime exemption
Unlike a revocable trust, asset transfers to an irrevocable trust are treated by the IRS as gifts. Therefore, the fair market value of the assets you place in the trust counts against your lifetime gift and estate tax exemption. Gift taxes may apply if the total value of your transfers exceeds certain limits.
Whether an irrevocable trust is right for you depends on your priorities and objectives. If you’re considering one, it’s prudent to get professional guidance tailored to your specific goals, financial picture and long-term plans. It can go a long way in helping you make informed decisions that protect your interests and the well-being of your loved ones.