Should You Set Up An Irrevocable Trust?

03/2023

Setting up an irrevocable trust is a high-stakes process. Unlike its alternative (a revocable trust), the grantor cannot make changes once they create the trust, which often causes reluctance. However, they can be a necessity in one’s long-term personal finance plan. While you may be passing off control and flexibility, you’re gaining greater asset protection. If you plan to set up an irrevocable trust in Ohio, here’s what to consider before the transfer process.

Revocable Trusts vs. Irrevocable Trusts in Ohio

Ohio law mandates that a grantor be a legal adult and of sound mind when creating the terms of the trust. You must indicate your intent to establish a trust, name a beneficiary and a trustee, and then assign duties to this fiduciary. It’s also important to establish whether you’re setting up a revocable trust or an irrevocable trust. The best option for you depends on your unique needs and circumstances. We recommend speaking with an irrevocable trust lawyer to best understand each arrangement, but we’ve provided a brief overview below.

In a revocable living trust, the grantor has total control over their trust assets during their lifetime. Then, upon the grantor’s death, a successor trustee steps in to manage and distribute assets. It’s important to note that a grantor can revoke their trust any time before their death or becoming incapacitated. This can be a great option for someone who does not want to limit their power over their assets while living.

By contrast, once an irrevocable trust is created, the designated assets are technically no longer in the grantor’s hands. Most are testamentary trusts versus Inter Vivos since the transfer occurs while the trust maker is still alive.

Why Should I Set Up an Irrevocable Trust?

There are a handful of scenarios where an irrevocable trust could benefit the creator more than a revocable trust. Keep reading to learn when setting up an irrevocable trust in Ohio could be advantageous.

1. Greater Asset Protection

   Tying up your assets in an irrevocable living trust can protect them in certain situations. Not only are your assets placed out of your own hands, but also out of the hands of most collectors, offering more creditor protection. (Keep in mind this practice cannot protect against existing creditors or lawsuits.) Certain types of irrevocable trusts can also keep your assets from becoming subject to division during a divorce. For example, if you were planning to marry or remarry and wanted to secure any assets intended for your children, you could place them in an irrevocable trust.

2. Death or Estate Tax Exemptions

   Other types of irrevocable trusts can help you avoid death or estate taxes. Per the IRS, the 2021 federal estate tax and gift tax exemption is set at $11,700,000, meaning that combined assets under this amount are not taxable estate. These tax benefits are especially helpful if you have a large life insurance policy. Distributions are often taxed to the beneficiary at the federal income tax rate. However, you can minimize tax obligation through a grantor retained annuity trust (GRAT). This estate planning tool has a trust maker paying taxes once they set up the trust. Then, the grantor is paid annual annuities, and the beneficiary receives the trust tax-free once expired.

3. No “Spending Down” to Qualify for Medicaid

   If you’ve looked into Medicaid before, you may be familiar with the “spending down” process. The financial requirements sometimes require participants to spend down some of their assets to be eligible for enrollment. Assets tied into an irrevocable living trust are not counted towards Medicaid eligibility as they are technically out of your hands.

4. Avoid Lengthy Probate Proceedings

   Like revocable trusts, irrevocable trust funds and assets will not pass through probate, which can be a lengthy and frustrating process. Although it’s often necessary, probate can take a while, especially if there was never a trust agreement in place. In other unfortunate scenarios, probate litigation disputes can emerge following a grantor’s death, requiring the family to take court action. Whether or not you open an irrevocable trust, you may want to speak with an estate planning attorney to learn how to title property and avoid probate.

Bottom line, trusts can be a valuable tool in your personal finance plan, but they’re not the right solution for everyone. We still recommend having some long-term asset protection to ensure your assets are managed how you intend them to be. Our irrevocable trust attorneys understand how complicated estate plans can be. We treat all our clients with the same patience, honesty, and respect we show to our own families.

Speak with a Solomon, Steiner, and Peck attorney to learn more about trust administration in Ohio!