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October 9, 2020

Do Irrevocable trusts avoid probate?

Do Irrevocable trusts avoid probate?

Trusts are normally used as part of an estate plan. Trusts help offer multiple benefits to the beneficiaries of a decedent upon death. Such as avoidance of probate as well as potentially avoiding payment of estate taxes. Benefits to the decedent include the ability to control how the trust assets are used even after death. But is it really possible to avoid probate?

What is an Irrevocable trust?

Do Irrevocable trusts avoid probate? Trusts are divided into two main categories: revocable and irrevocable. Revocable trusts can be changed or modified during the grantor’s lifetime. While irrevocable trusts cannot. Irrevocable trusts can be particularly useful when it comes to estate planning, so let us take a closer look. Do Irrevocable trusts avoid probate?

An irrevocable trust cannot be modified or terminated. Except under specific circumstances. Although a revocable trust can generally be modified or terminated at any time by the grantor, an irrevocable trust is not so easy to change or terminate.

State laws govern trusts. However, in most statesmen irrevocable trust, can only be modified by agreement of all beneficiaries and the grantor. If still alive, or by a court. Because of the nature of these trusts, assets placed in the trust are trust property from the moment of creation of the trust. This aspect of an irrevocable trust provides two important benefits — avoidance of probate and avoidance of estate taxes.

Yes or No?

So, Do Irrevocable trusts avoid probate? In the event the decedent’s estate is required to go through probate, all things owned by the decedent are held until the probate process is officially complete. Probate can take months, or even years in some cases, to complete. Assets placed in a revocable or irrevocable trust can pass directly to the beneficiaries upon the death of the grantor, thereby avoiding probate.

In addition, because the assets placed in an irrevocable trust are no longer looked to be owned by the grantor, and are not part of the estate at the time of death, they are also not subject to estate taxes (unless the grantor is entitled to enjoy the income therefrom or use of the assets during life, and unless it was transferred within 3 years of death). The estate tax rate is subject to change, but is generally high, making an irrevocable trust a financially sound option as part of an estate plan.

Two forms of trusts

There are two basic forms of irrevocable trusts. Some irrevocable trusts are created and funded during the grantor’s lifetime and can come in many forms. For example, a qualified personal residence trust (QPRT) can hold the grantor’s primary or secondary residence and reduce its taxable value for estate purposes.

A grantor retained annuity trust (GRAT) can potentially allow money to be transferred to heirs without any estate tax liability. There are many different types of irrevocable trusts that can be created, each with its own setup procedures and legal considerations.

When is an irrevocable trust a good idea to do?

 

Legal protection:

Assets in an irrevocable trust have greater protection from creditors and anyone else seeking to obtain a judgment against you. You no longer own the assets (the trust does), so they are protected to the extent that bankruptcy and insolvency laws do not allow a clawback of such assets. On the other hand, a revocable trust is still considered to be an asset of the grantor and therefore is not protected from legal action.

Estate planning:

An irrevocable trust typically does not count toward the value of your estate. Estate taxes kick in on estates valued at more than $5.49 million as of 2017, and the top estate tax rate is 40%. Therefore, by placing certain assets into irrevocable trusts before the assets rise in value, it can reduce the tax burden on your heirs if your estate is large.

Qualifying for benefits:

There are several situations where this may be an advantage, and Medicare is one big example. By transferring your assets out of your ownership, you might be able to avoid mandatory depletion of your assets to say, pay for in-home care benefits.

Preventing misuse of your assets:

An irrevocable trust can distribute your assets to heirs or beneficiaries on a conditional basis, as in the example of monthly payments discussed earlier.

The main downside to an irrevocable trust is simple:

It is not revocable or changeable. You no longer own the assets you have placed into the trust. In other words, if you place a million dollars in an irrevocable trust for your child and want to change your mind a few years later, you are out of luck.

Many people set up this type of trust is for estate and tax purposes. Since you are rescinding ownership of certain assets — as they are now in the trust — you are no longer liable for estate tax. If a home in the trust produces income, you are not required to pay the taxes on that, either. Simply put, it is a way to save money on your tax bill. An irrevocable trust may also limit your estate’s vulnerability to creditors.

If you die with debt, your assets can be sold off to creditors to pay it off. If you want to pass along your estate to your heirs, like your children, an irrevocable trust might help. You will no longer own the estate — the trust does — which means it is safe from creditors and legal judgments.

Why irrevocable trusts have value

An irrevocable trust is a valuable tool because it avoids the probate process. When a grantor places property into an irrevocable trust, he or she no longer owns those assets. It is then the trustee’s responsibility to distribute the property according to the terms of the trust. By avoiding probate, the beneficiaries can keep this process private. They do not have to go through the probate court system, which also saves them time, stress, and money.

In addition to avoiding the probate process, the irrevocable trusts protect the assets from creditors and lawsuits. It removes the property from personal income tax and gift exemptions — meaning the beneficiaries may be able to avoid estate taxes on the property. (Revocable trusts also avoid probate, but do not have all of the same tax and asset protection benefits).

Irrevocable trusts are detailed and complicated and should not be attempted without the advice of an estate planning attorney. You want to make sure that everything is correct and according to your wishes before putting those permanent terms in place.

About CPLS

CPLS, P.A. was founded as a full-service law firm. They offer a wide range of legal services to individuals, small businesses, and multi-national corporations. The Firm has grown to also include executive consultants and mediators to meet the diverse needs of its clients. The firm is an official center for professional leadership services in law, consulting, and mediation.

CPLS counsels and represents business clients across virtually all industry sectors. This including, investment firms, financial institutions, accounting firms, retail and wholesale firms, hospitality and health and wellness firms, and entertainment firms. They represent start-ups, small to medium-sized businesses. Middle-market companies, as well as a broad range of multinational publicly and privately-held companies.

They also counsel and represent individuals. Rank and file workers and executives to professionals dealing with life-altering events. It’s a team of lawyers, consultants, and mediators. This team focuses on helping our clients manage risks, solve life-altering problems, manage the transition, pursue dreams, and grow and develop to reach their potential.

Attorney Aubrey Harry Ducker Jr. is a current member of the CPLS staff.