Wealthy individuals have often employed estate planning mechanisms to safeguard their financial legacy, and one such tool typically used is the irrevocable trust, which can help mitigate estate taxes. While they do present some downsides, they can also be useful for protecting against external threats, and the ability to transfer wealth to future generations in line with very precise conditions also makes them appealing. Learn about the fundamentals of irrevocable trusts, including what high net worth individuals need to know, and discover how Roulet Law Firm, P.A. might aid those looking to preserve the financial future of their loved ones by contacting an experienced lawyer from our Minnesota office ((763) 420-5087) or our Florida location ((941) 909-4644). Or, you can fill out the contact form on this page and a member of our team will reach out to schedule your consultation.
Who Are High Net Worth Individuals?
A high net worth individual (HNWI) is someone whose assets (excluding their main home) exceed $1 million. According to the United States Census Bureau, in 2022, the wealth of 10% of households exceeded $1.6 million, potentially falling within the definition of HNWIs.
What Are Irrevocable Trusts?
A trust is a legal mechanism where the person establishing the trust (the grantor) moves their assets to a separate legal entity managed by another party (the trustee) on behalf of those who stand to benefit from the assets within the trusts (the beneficiaries). Upon establishing a trust, the grantor stipulates the trust’s terms, including when and how to make distributions, as well as how the trustee/beneficiaries may use the trust’s assets. The Internal Revenue Service (IRS) defines an irrevocable trust as one whose grantor cannot revoke or change (unless a court or the grantor’s beneficiaries permit this) due to the grantor relinquishing their ownership rights of the assets after transferring them.
An irrevocable trust’s primary aim is to minimize estate taxes as a result of removing the assets from the settlor’s taxable estate and safeguard assets from external threats, such as lawsuits, creditors, and disinherited heirs. This latter benefit is possible due to the trust legally owning the assets instead of the grantor, which is helpful for settlors who work in professions vulnerable to litigation, such as attorneys or doctors.
Types of Irrevocable Trusts
An irrevocable trust can either be a testamentary or a living trust. The former comes into effect upon the creator’s death according to the terms outlined in the decedent’s will, and the only way to alter this type of trust is to adjust the will’s terms prior to the grantor’s death. On the other hand, grantors create and fund living trusts during their lifetime.
Does an Irrevocable Trust Count Toward Net Worth?
An irrevocable trust can be designed so that assets moved intothem do not count toward the value of the grantor’s estate, helping to reduce that estate’s tax liability. On top of this, a settlor can implement an irrevocable trust for other reasons, such as to prevent the misuse of assets by beneficiaries through the setting of strict distribution conditions, to store their life insurance policy to keep the death proceeds separate from their estate, and to gift property while still keeping the assets’ income.
Explore irrevocable trusts in more detail, and discover additional estate planning options for high net worth individuals by contacting a knowledgeable Florida estate planning attorney. Request a consultation with Roulet Law Firm, P.A. to understand your estate planning goals and how our firm can help you achieve them.
What Assets Should Be Placed in an Irrevocable Trust?
A grantor can transfer practically any asset to an irrevocable trust, including stock portfolios, real estate, cash, business interests, and life insurance policies. The most ideal asset for this type of trust largely depends on a person’s legacy planning goals. For instance, if the aim is to reduce a person’s taxable estate to meet the gift tax exemption threshold and maximize the value of tax-free assets to pass on to loved ones, it can be worthwhile to transfer any valuable asset, as well as any asset that is likely to appreciate significantly in value, to an irrevocable trust.
Who Is the Best Trustee for an Irrevocable Trust?
When choosing a suitable trustee to manage an irrevocable trust, several points are worth considering beforehand; for instance, the trustee needs to be willing to take on the responsibility for an extended period and be approachable. Whether opting for a professional trustee, a close friend, or a family member, make sure to pick a trustworthy, reliable, and honest party with a track record of ethical conduct. In addition, effective irrevocable trust management requires an ability to handle complex legal and financial matters, making a party with legal/financial experience an ideal choice.
Other valuable qualities for the trustee of an irrevocable trust include the ability to remain impartial and act in the beneficiaries’ interests. Finally, an ideal trustee is able to openly communicate the trust’s financial performance and activities with the beneficiaries.
What Is the Downside of an Irrevocable Trust?
Despite its benefits, an irrevocable trust does come with several downsides. Most notably, the grantor loses direct control of any assets placed in the trust, including the ability to alter the trust’s terms, access its assets, or revoke the trust. To effectively safeguard a grantor’s interests, the trust needs to be highly precise, a complex task to achieve, which is where an attorney can help. The assets placed in an irrevocable trust may still also incur tax, such as taxes on any assets that produce income and generation-skipping transfer tax, and the grantor or trustee could be responsible for these taxes depending on the structure of the trust.
Learn More From an Experienced Florida and Minnesota Estate Planning Attorney
An irrevocable trust is one of several estate planning tools that can offer affluent individuals various possible benefits, such as asset protection, probate avoidance, charitable giving opportunities, and tax savings, but these mechanisms necessitate ongoing management and effective structuring to make the most of them. In addition, users may want to consider the disadvantages of implementing this tool, which include its complexity and inflexibility. To ascertain whether irrevocable trusts are appropriate for their circumstances, high net worth individuals may want to consider consulting with a seasoned Minnesota estate planning attorney; call Roulet Law Firm, P.A. today at (763) 420-5087 (if Minnesota-based) or (941) 909-4644 (for Florida residents) to learn more. Or you can fill out the contact form on this page and a member of our team will reach out to schedule your consultation.
Or, if you are not yet ready to schedule a consultation and would like to learn more, here is some additional information:
