When a person passes away, his or her estate may be subject to the probate process as well as sending estate taxes to the IRS. However, those who create an irrevocable trust for themselves may avoid the probate process while keeping the details of their estates private. What should you know about an irrevocable trust to assist with estate planning?
What Is An Irrevocable Trust?
An irrevocable trust is created when an individual puts assets into a trust controlled by a third-party trustee. The terms of the trust cannot be changed unless the trustee and all beneficiaries agree to make such changes. When the person who created the trust passes away, the trustee will execute that trust according to its terms. Depending on how the trust is structured, some items will be exempt from tax or held outside of the estate, which lowers the value of the estate for tax purposes.
What Can Be Put in an Irrevocable Trust?
There are many items that could be placed in such a trust. If a parent owns a home that he or she wants to be passed on to future generations, that home can be placed in the trust. Money can be placed in the fund that will be released to an individual’s children when they reach a certain age or meet other conditions. Essentially, any assets that someone is willing to give up control over can be put in the trust.
Anyone Can Be Named a Trustee
The nice thing about a trust is that almost anyone can be named a trustee. The only rules are that the person cannot have a direct conflict of interest with the trust or be appointed against his or her will. This means that beneficiaries are generally not able to be a trustee or will be highly scrutinized if they do. Someone who acts as a trustee may be paid a salary for as long as they act in that role.
Assets in an Irrevocable Trust May Be Shielded From Creditors
Anything that is put in such a trust may not be accessed by creditors when the estate’s debts are settled. For example, if the deceased individual had $30,000 of credit card debt and $30,000 in the trust, that money cannot be taken by creditors. However, this only applies if the money is put in the trust before creditors make it known that they intend to take legal action against that person.
It Could Be Ideal for Someone Who Has Been Divorced
In a situation where a person is only married to one spouse or has been in a blended family for a significant amount of time, assets going to the right heirs may not be an issue. However, if the adult child of a deceased individual’s second wife claimed that he or she should be eligible for a piece of the estate, a legal battle could ensure. When a trust is created, the assets of the trust only go to those named in the trust. Additionally, challenging the trust in court is difficult because a judge is not obligated to review the trust or its terms.
Trusts Can Spell Out What Happens if its Creator is Mentally Incapacitated
The terms of a will cannot be changed unless the creator of the will changes those terms. This means that family members or others could try to alter its terms and claim that was the intent of that person all along. The terms of a trust can be written to direct the trustee as to how to proceed if its creator loses the mental capacity to make decisions.
An irrevocable trust can be a great way to reduce taxes and reduce the odds of a legal fight over an estate after someone dies. Talking to an attorney or an estate planning expert may be enough to start the process of creating a trust.
