Irrevocable trusts are used frequently in estate planning for a wide variety of purposes. Irrevocable trusts can be used to make a completed gift of assets, while restricting access to the assets or retaining indirect control. Irrevocable trusts can be used in order to help protect assets from creditors of the trust beneficiaries. Such trusts even can be used as part of planning to qualify for Medicaid benefits.
The most typical irrevocable trust is the Irrevocable Life Insurance Trust or “ILIT.” An ILIT is an irrevocable trust that is designed to hold life insurance on the life of the person setting up the trust, the “grantor.” By contributing life insurance to an ILIT, the insurance can be kept from being taxed in the insured grantor’s estate at his or her death.
While irrevocable trusts have unique advantages, they have one significant disadvantage: they cannot be revoked or changed by the grantor. However, irrevocable trusts can be drafted so that a disinterested party, the “special co-trustee” or “trust protector,” can make limited changes to the document. For example, if the trust was set up for your two kids, Mary and Johnny, it may make sense to modify their interests depending upon their changing circumstances. A good example of this would be if Johnny won the lottery. In that instance, the parents may want someone to be able to carve back Johnny’s inheritance in favor of Mary’s share.
Sometimes it may be beneficial to start over with a new trust. The problem is that the grantor may not be insurable anymore. Further, if a policy is gifted to the trust, there is a three year waiting period for it to be out of the estate. As an alternative, the grantor could set up a new trust and have the trustee of that new trust purchase the policy from the old trust. This avoids the three year waiting period. The built-up cash value of the policy will remain in the old trust. However, the death benefit will now pass via the new scheme of disposition.
Irrevocable trusts often seem daunting at a distance. However, a qualified estate planning attorney can assist you in determining whether an irrevocable trust is consistent with your overall goals. If you currently have an irrevocable trust, a qualified estate planning attorney can help you explore the options that may be available to change terms of the trust or shift assets to a different trust.
Mr. Ronald “Chip” Morrison, Jr. is a member of the American Academy of Estate Planning Attorneys and has been engaged in the practice of estate law for the last 16 years throughout southern Louisiana. He is a board-certified estate planning attorney with experience in both simple and complex estate matters. For more information or to attend an upcoming seminar, please call our office at (504) 831-2348 or contact us through our website.