Why Financial Planners Need to Understand Modern “Irrevocable” Trusts

By Bakalar & Asociates, PA

Many financial planners have been ill advised regarding the modern benefits of Irrevocable Trusts.  Traditional Irrevocable Trusts pose several historical problems which include:

1.         Requirement for a new EIN number from the IRS for income tax purposes;

2.         Increase in income taxes based on the way Irrevocable Trusts are taxed;

3.         Loss of the “Step-Up” in basis upon the death of the Settlor;

4.         Loss of management control over investment of Trust assets;

5.         Loss of the ability to replace or make changes to Trust beneficiaries;

6.         Loss of the ability to make changes to the Trust provisions as laws change.

Many Financial Planners have been advised that the use of a “Revocable” Trust can avoid these pitfalls. 

Unfortunately, many Planners have not been advised that all of these pitfalls can still be avoided by a modern “Irrevocable” Trust which offer many advantages that are simply not available with a “Revocable” Trust. For example:

1.         An Irrevocable Trust can be set up as a “Grantor Trust” so that the Trust is disregarded for income tax purposes;

2.         Thus, there is no need for a new EIN, and there is no increase in income taxes;

3.         The Trust assets are still part of the Settlor’s Estate thereby preserving the Step-Up in basis upon the Settlor’s death;

4.         The Settlor can retain complete control over the investment of Trust assets;

5.         Because the Trust is “Irrevocable”, assets transferred into the Trust are protected against future creditor claims;

6.         The Settlor can retain a limited power of appointment to replace or make changes to Trust beneficiaries without subjecting the Trust assets to creditors;

7.         Trust provisions protect “Inherited” IRAs from creditor claims;

8.         Trust assets are protected from the surviving spouse’s future marriage without the need for pre or post nuptial agreements;

9.         The Trust can appoint a Trust Protector to make changes to the Trust to comply with future changes in the law.

10.    Under certain conditions an Irrevocable Trust may be partial or even fully revoked allow the Settlor to reacquire the Trust assets.

There are major advantages to modern Irrevocable Trust planning instead of or in conjunction with a Revocable Trust.  Together, these tools allow greater flexibility for investing Trust assets without exposing such assets to creditor claims.

If you have questions regarding Irrevocable Trusts, Trust Planning, Elder Law or Estate/Asset Protection, contact the Law Office of Bakalar & Associates, PA at 954-475-4244 or by email to info@assoc-law.com