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When are irrevocable trusts a good idea?

An irrevocable trust can maintain your wishes after you die, but it will cost you some flexibility. While a last will and testament requires a probate court process to distribute your assets to heirs, most trusts avoid probate. However, your lifestyle and personal preferences will dictate whether an irrevocable trust or a revocable trust is best suited to your needs.

Estate planning is a complex process. Find a financial advisor that can help you today.

What Is an Irrevocable Trust?

True to its name, an irrevocable trust is just that: Irrevocable. The person who creates the trust — the grantor — can’t make changes to it.

Only a beneficiary can make and approve changes to it once it’s been created. Once you transfer ownership into the trust, you don’t have control over those assets anymore. With a revocable trust, the grantor retains all rights to change or even terminate the trust.

Revocable living trusts are more common, since it gives the creator more control. If you experience major life changes, like selling a house that was your trust, you may want to make updates yourself. But there might be instances when an irrevocable trust is a better move.

When Is an Irrevocable Trust a Good Idea?

When are irrevocable trusts a good idea?

If you’re creating a trust, you may have specific assets that would benefit from an irrevocable trust. Many people set up this type of trust is for estate and tax purposes.

Since you’re rescinding ownership of certain assets — as they’re now in the trust — you’re no longer liable for estate tax. If a home in the trust produces income, you’re not required to pay the taxes on that, either. Simply put, it’s a way to save money on your tax bill.

An irrevocable trust may also limit your estate’s vulnerability to creditors. If you die with debt, your assets can be sold off to creditors to pay it off. If you want to pass along your estate to your heirs, like your children, an irrevocable trust might help. You’ll no longer own the estate — the trust does — which means it’s safe from creditors and legal judgments.

One important note: irrevocable trusts are not only for the very wealthy. Many types of people with many different financial situations can benefit from using a irrevocable trust.

Types of Irrevocable Trusts

There are several available options that qualify as irrevocable trusts:

Irrevocable Life Insurance Trust

An irrevocable life insurance trust, for example, is a trust designated as the beneficiary of your life insurance policy.

When you die, proceeds are paid into the trust before a trustee manages them for your beneficiaries beneficiaries. An irrevocable life insurance trust may be worth considering if you want to avoid estate taxes on large life insurance payouts.

Irrevocable Marital Trusts

A bypass trust, or marital trust, transfers assets from one spouse to another at the time of the first spouse’s death. The surviving spouse has a trustee managing those assets, which keeps them outside of the estate.

The surviving spouse can receive income from the trust as well as principal, if the grantor gives either the trustee or the surviving spouse power to do so. That said, the grantor may limit the withdrawal to a set amount.When the surviving spouse dies, remaining assets go to beneficiaries, free of estate tax.

Irrevocable Charitable Trusts

There are also two irrevocable charitable trusts to choose from: A charitable lead trust and a charitable remainder trust. The first allows you to yield certain to charitable organizations, with the rest of your assets going to your beneficiaries when you pass away.

A charitable remainder trust allows you to receive income from your assets for a set period of time. Any remaining assets or income go to a charity of your choice. However, since it’s an irrevocable trust, you can’t change the payout amount even if your needs change.

Bottom Line

When are irrevocable trusts a good idea?

If you’re on the hunt for setting up your afterlife affairs, you have a few options, including trusts. There are many different types of trusts and the one you pick depends on your situation.

Regardless of what you choose, it’s best to talk to a professional. Seek help from an estate lawyer or another expert to help you navigate your assets, affairs and how you want them handled once you pass. Having a plan — any plan — not only helps your heirs handle your things but also gives you control over how you want your things handled.

Tips for Estate Planning

  • Although an estate planning attorney is a worthwhile resource for anyone putting together their estate, a financial advisor can take a more holistic look at your finances. Luckily, finding a suitable financial advisor to help you with your estate planning needs is much easier with SmartAsset’s free tool. Through this, you’ll be matched with financial advisors in your area in just five minutes. Get started today.
  • Estate planning can be a challenge, and bad decisions can be costly. To help, take a look at SmartAsset’s guide on the five estate planning mistakes you can’t afford to make.

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Dori Zinn Dori Zinn has been covering personal finance for nearly a decade. Her writing has appeared in Wirecutter, Quartz, Bankrate, Credit Karma, Huffington Post and other publications. She previously worked as a staff writer at Student Loan Hero. Zinn is a past president of the Florida chapter of the Society of Professional Journalists and won the national organization's "Chapter of the Year" award two years in a row while she was head of the chapter. She graduated with a bachelor's degree from Florida Atlantic University and currently lives in South Florida.
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