Irrevocable Trust: Why?

26 Aug 2023 · 1 min

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1:01

The speaker explains irrevocable trusts, noting that while they are technically changeable, modifications require agreement from both the trustee and the beneficiary, making the process difficult. By placing assets in an irrevocable trust, the settlor removes those assets from their taxable estate, which can help avoid federal estate tax (currently around $12 million) but also forfeits the step‑up in basis that revocable trusts provide. The trust also offers protection against lawsuits, creditors, ex‑spouses, and Medicaid eligibility, though protection periods differ (typically five years for Medicaid and about two years for other protections). Finally, the speaker points out that irrevocable trusts are generally more costly to establish and maintain than revocable trusts.

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Now, an irrevocable trust. The name says the trust is irrevocable, but you actually can change it, but the bar to do so is very high. The person you name as trustee and your beneficiary must agree with you about the changes, but you are giving up control of the asset. It is no longer in your name. One big benefit you get by doing so is that that asset is no longer a part of your estate. The federal estate tax right now is very high, about $12 million, but many people are concerned that that's going to come down. And I'm seeing many more people with interest in removing assets from their estate so that it won't be subject to federal estate tax when they die. However, any assets you put in there generally will not receive a step-up in basis on the gain in value of the asset, whereas in a revocable trust, they do. An irrevocable trust also provides protection against lawsuits and creditors and ex-spouses once that asset has been in there for a certain period of time. For instance, protection against Medicaid for long-term care benefits, the asset has to be in the trust for 5 years. For other types of protection, it's generally 2 years. An irrevocable trust will also be more expensive than a revocable trust.