Irrevocable trusts are often put into place for creditor protection or tax reduction – or sometimes for both purposes. For certain tax planning strategies, gifting assets to an irrevocable trust allows a person to no longer be the tax owner of the property. This may be valuable for estate tax minimization purposes. In these situations, an individual is still able to exert limited control of his or her property, without transferring full ownership and control to named beneficiaries until death.
Some irrevocable trusts are designed so that property is owned by the trust and not by the creator, allowing the creator to qualify for certain government benefit programs. Sometimes, however, the transfer of assets to an irrevocable trust can start a penalty period.
When deciding which assets to transfer to an irrevocable trust, it’s important to consider that the creator will lose control over the assets. Some individuals wouldn’t feel comfortable transferring an investment portfolio to an irrevocable trust, but they may feel differently about transferring a vacation home or life insurance policy.
A common question we are asked is “Which is better, a revocable trust or irrevocable trust?” That answer depends on what your planning goals are. Once we spend time with a client identifying their goals, we are in a position to recommend the tools to accomplish that goal.