Estate Planning Series: Irrevocable Trusts, A Comprehensive Overview

In last month’s blog, “Estate Planning Series: Trusts Overview” we discussed the different elements of a trust such as trustee selection and funding a trust. This month we’re diving into the specifics of irrevocable trusts.

Trusts are a versatile estate planning tool to protect and manage assets, provide for loved ones, and achieve a wide range of financial objectives. From safeguarding assets for minors or beneficiaries with special needs to maximizing charitable giving, there are many types of trusts to achieve your goals.  The following is a survey of a few prominent trust types; many more exist, and the attorneys at Skufca Law are ready to assist you in navigating the complex trust landscape and identify the right path for you.

Irrevocable Life Insurance Trust (ILIT)

ILITs are used to hold life insurance policies outside the grantor’s taxable estate. This reduces potential estate taxes and provides a tax-free death benefit to beneficiaries.  This is an especially useful tax-planning tool for high-net-worth individuals, but it is also useful for providing liquidity to any estate.

The trust purchases and owns life insurance policies on the grantor’s life. Upon the grantor’s passing, the insurance proceeds are distributed to the trust and then to the beneficiaries free from estate tax.

Spousal Lifetime Access Trust (SLAT)

SLATs are another tool that removes assets from the grantor’s estate for estate tax planning purposes. This trust offers flexibility by allowing the beneficiary spouse direct access and the donor spouse indirect access to the grantor’s (the donor spouse’s) assets while removing those assets from the estate.

A grantor establishes an irrevocable trust for the benefit of their spouse, with the trust assets providing income and financial support. By removing these assets from the grantor’s estate, estate tax liabilities are reduced.

Special Needs Trust

A Special Needs Trust, also known as a Supplemental Needs Trust, is an irrevocable trust designed to provide financial support to individuals with disabilities without jeopardizing their eligibility for government benefits such as Medicaid and Supplemental Security Income (SSI). It ensures that the beneficiary receives essential financial assistance while maintaining eligibility for assistance programs.

The trust is funded with assets that are managed for the benefit of the individual with special needs. These assets can cover various expenses not provided for by government programs, enhancing the individual’s quality of life. Because the assets are held in an irrevocable trust, they are not counted as the individual’s assets for eligibility concerns.

Spendthrift Trust

A Spendthrift Trust is established to protect a wayward beneficiary’s inheritance from their own poor spending habits or potential creditors. The trust’s terms restrict the beneficiary’s access to the principal, ensuring that it is used prudently over time.

The trust is managed by a trustee who has the discretion to distribute funds to the beneficiary as needed or according to the trust’s terms. Creditors typically cannot access the assets in the trust, providing a level of protection.

Education Trust

An Education Trust is created to fund the educational expenses of a beneficiary, such as a child or grandchild, ensuring that educational opportunities are financially supported.

The trust is funded with assets specifically earmarked for educational expenses. These funds can cover tuition, books, supplies, and other costs associated with higher education.

Medicaid Asset Protection Trust (MAPT)

MAPTs are established to protect assets from being counted as resources for Medicaid eligibility purposes. Assets timely placed in a MAPT are also shielded from being used for Medicaid reimbursement after the grantor’s death. This makes them valuable tools for long-term care planning.

Assets are transferred into the trust, removing them from the grantor’s control but preserving their use for the benefit of the grantor and their spouse.  Provided that the MAPT was created at least 5 years before the grantor applies for or uses Medicaid, the assets in the MAPT are protected from Medicaid eligibility and reimbursement calculations.

Qualified Personal Residence Trust (QPRT)

QPRTs allow the grantor to transfer their primary residence or vacation home into an irrevocable trust while retaining the right to live in the property for a specified period. This can help reduce the taxable estate while preserving use of the residence.

The grantor transfers the residence into the trust, retaining the right to live in it for a set number of years. After the term ends, the property is owned by the trust, outside the grantor’s estate for estate tax purposes.

Qualified Terminal Interest Property Trust (QTIP)

QTIP trusts are commonly used in second marriages to provide income to a surviving spouse–the second or current spouse–while ensuring that the remaining assets pass to beneficiaries specified by the grantor. This is useful if both the grantor and the second or current spouse have children who from a former relationship.  This allows the surviving spouse to retain access to the whole marital estate until they pass, at which point the grantor’s marital share will pass to his or her children or other beneficiaries rather than to the surviving spouse’s children or beneficiaries (which would effectively disinherit the grantor’s children).

The trust provides income to the surviving spouse for their lifetime, after which the remaining assets pass to beneficiaries chosen by the grantor, typically children from a previous marriage.

Charitable Remainder Trust (CRT) and Charitable Lead Trust (CLT)

These trusts allow individuals to make significant charitable contributions while providing income to beneficiaries during their lifetime (CRT) or to charity during the trust term (CLT).

CRTs provide income to beneficiaries for a specified period, after which the remaining assets go to charity. CLTs, on the other hand, provide income to charity for a set term, after which the assets pass to non-charitable beneficiaries.

Gun Trust

This can be an aspect of a revocable trust or a separately established revocable trust. It is drafted to ensure the compliant transfer of both non-NFA and NFA firearms.

When beneficiaries for the firearms are named in the gun trust, the firearms pass directly to the named beneficiary without them having to go through the transfer fee and other restrictions of owning and possessing the firearm.

These trust strategies represent powerful tools in estate planning, offering solutions for asset protection, eligibility concerns, and wealth transfer. The choice of which trust to use depends on your specific goals and circumstances. At Skufca Law, we are prepared to work with you and your financial advisor in helping individuals like you navigate the intricacies of trust planning. Contact us today to discuss how these trust strategies can be tailored to meet your specific needs and secure your financial future.

Coming up next: Stay tuned for our next blog in our Estate Planning Series where we will discuss protecting your digital assets within your estate plan.