If you have only just dipped your toes into the world of trusts, you may find yourself slowly backing away as the sheer amount of information can be overwhelming. There are many different types of trusts that can serve a variety of purposes. Knowing what is what can quickly become confusing when you are just trying to get a grasp on the basic terminology of it all. Trusts, however, remain useful estate planning tools and they are worth knowing about. So, in the hopes that we can help your initial exploration into trusts to be fruitful and not overwhelming, we want to start with some of the basics of irrevocable trusts.
Irrevocable Trust Basics
To establish an irrevocable trust, the trust creator, referred to as the “grantor,” establishes the trusts and funds it by placing assets into it. To place assets in a trust, title and ownership of the asset are put in the trust’s name. So, essentially, the grantor is relinquishing ownership and control over the assets placed in the trust. The trust will then be managed by a named trustee for the benefit of the trust beneficiaries. What makes an irrevocable trust “irrevocable?” Well, as its name suggests, an irrevocable trust cannot be revoked. In fact, it is near impossible to revoke, amend, or end this type of trust.
The terms of the trust will dictate how and when the trustee is allowed to make distributions from the trust to the beneficiaries. The grantor is free to place any number of conditions on such distributions. For instance, the grantor may want to restrict any distributions until the time when the beneficiary reaches a certain age or milestone, such as going off to college.
Why would a person relinquish control of assets to place in a trust that essentially cannot be changed or revoked? It is a lot of control to give up. With the relinquishment of control, however, comes a host of advantages that are offered by irrevocable trusts. For instance, an irrevocable trust can reduce taxes as it can act as a tax shelter. It can also shield certain property from creditors being able to go after it to satisfy outstanding debt obligations.
Irrevocable trusts can also shield property from inclusion in income calculations for certain need-based government benefits, allowing a person who may otherwise be disqualified from actually qualifying for them. This is why irrevocable trusts can be particularly valuable in Medicaid planning. Instead of spending down assets before qualifying for Medicaid, a person can transfer assets into an irrevocable trust so that they fall outside of the calculation for Medicaid purposes. This is because the property placed in an irrevocable trust are no longer the property or under the control of the grantor and so are not included in income and asset calculations.