Depending on your lifestyle and financial needs, you may have looked into opening an irrevocable trust. For many, they serve as an excellent tool for protecting assets and avoiding harsh tax rates. However, there are some irrevocable trust disadvantages and setbacks you’ll have to come to terms with. If you’re unsure if opening one up is the right move, take a look below. The lawyers at Solomon, Steiner & Peck, Ltd. explain some of their pros and cons in more detail.

What are Irrevocable Trusts?

As the name suggests, irrevocable trusts are trusts that (in most cases) cannot be changed, modified, or revoked once established. Once you create an irrevocable trust and designate your trustee, beneficiaries, and set the terms and conditions, the assets transfer from your ownership to the trust’s ownership. After you pass, the trust usually keeps hold of your assets for a set time before passing them on to your beneficiaries. 

Irrevocable Trust Disadvantages and Advantages Explained

Like many estate planning options, irrevocable trusts have their advantages and disadvantages. If you’re unsure if they’re the right option for you or your family, familiarizing yourself with the different pros and cons can be a good first step to take in reaching your decision. 

The Pros of Setting Up an Irrevocable Trust

In some instances, including an irrevocable trust in your estate plan can be a smart move. For one, it can significantly help reduce your tax liability. The larger your estate is, the more you benefit from estate tax rate exemption. Say, for example, you decide to transfer your taxable assets from your estate into an irrevocable trust. Since you no longer claim ownership and the assets no longer fall under your taxable estate, any generated tax income is revoked. 

Besides their pronounced tax exemption perks, there are other lesser-known advantages of opening up an irrevocable trust. Many individuals rely on them for:

  • Protection against Lawsuits: Unlike revocable trusts, irrevocable trust assets aren’t owned by the grantor.  Therefore, they’re protected against creditors or anyone who may threaten to take legal action or press charges against you.
  • Protection against asset misuse: It’s not unusual to see beneficiaries recklessly spending or managing their assets poorly. With an irrevocable trust in place, assets are dispersed on a conditional basis.  
  • Avoiding Probate: Once placed into an irrevocable trust, the trust owns property assets. Rather than go through probate, the trustee must then disperse property assets as set forth by the terms of the trust. In turn, property distributions are kept private between beneficiaries and out of the court system, freeing up time and money. 

The Cons of an Irrevocable Trust

As with any type of trust, irrevocable trusts come with their own set of shortcomings. Many people, unfortunately, are drawn away from their unchangeable trust terms. Once you move your assets over to an irrevocable trust, you have little to no authority over them as the grantor. Considering how easily your finances, lifestyles, and relationships can shift over time, this can come as a considerable inconvenience. 

Additionally, when it comes to tax purposes, irrevocable trusts are regarded as separate legal entities. Any accumulated income tax is taxed independently from the trust creator and usually at a larger rate. If the trust ends up making more than $600 a year in trust income, the trustee is responsible for paying and filing federal income taxes with the IRS, and in some cases, a state income tax return. 

Given your unique circumstances, you may find more than enough reasons to set up an irrevocable trust. They’re a great way to safeguard against legal implications, and they can offer you asset protection. Still, even with these advantages, there’s a lot more to take into consideration. It may prove beneficial to consult with an estate planning attorney. The professionals at Solomon, Steiner & Peck, Ltd. are well-versed in estate planning. We can go over the different types of irrevocable trusts and help you invest in the right one. Contact our law office today to schedule your consultation

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