Risks & Drawbacks of the Irrevocable Trust

Estate Planning News Flash – Beware the Risks & Drawbacks of the Irrevocable Trust

By Attorney Paul Hanks Ironclad Living Trusts 

Thinking of obtaining an irrevocable trust ? Do you want to lose control over your assets ? Do you want to relinquish the ability to amend your trust ? Do you want to create a tax issue ? Do you want to create a huge headache if you wish to sell your home ? The wisest thing one can do whose thoughts drift to an irrevocable trust is to think again. 

For starters allow me to reply to a common inquiry, what are the upsides to an irrevocable living trust? Many people burdened by debt seek an irrevocable trust to defeat their creditors. However the truth of the matter is that a court can invalidate a transfer made into an irrevocable trust that was intended to avoid valid debts that are now in default. If one has credit delinquencies an irrevocable trust cannot be used as a shield against creditors. 

A legitimate reason for an irrevocable trust is to remove assets from the trust settlor’s control in order to allow that individual to qualify for Medicaid benefits. This type of trust is often referred to as a Medicaid Asset Protection Trust. However a downside in doing so is that the maneuver imperils the valuable step-up in tax basis on the settlor’s home thereby creating a capital gains tax issue. 

Another valid reason for an irrevocable trust only applies if you are within the class of extremely wealthy people. If you have famous actor wealth, an irrevocable trust can serve as vessel to reduce or eliminate estate taxes. An irrevocable trust is rarely needed for this purpose since by law less than 1% of all estates are subject to the death tax. This is due to what is known as the federal estate tax exemption which provides safe harbor protection for most estates against imposition of the death tax. The current federal estate tax exemption is $15 million per individual and $30 million for married couples.

With the narrow reasons for an irrevocable trust now nudged aside, let’s not forget the most important question that should be asked about an irrevocable trust. What are the drawbacks to having an irrevocable trust ? 

Would you like to create a living trust and later wish to change it but be unable to do so? If so, then choose the irrevocable trust.

Would you like to create a living trust with substantial sums of your own money which you can no longer access or control? If so, then choose the irrevocable trust.

Would you like to create a living trust which results in the loss of your ability to manage your investments? If so, then choose the irrevocable trust. 

Would you like to create a living trust that impairs your ability to sell your home and freely use the home as an asset in your favor? If so, then choose the irrevocable trust. 

Would you like to name beneficiaries under a living trust and then be unable to change those beneficiaries? If so, then choose the irrevocable trust. 

Would you like to create a living trust which creditors often challenge in court? If so, then choose the irrevocable trust.

Would you like to create a living trust which can lead to a tax liability? If so, then choose the irrevocable trust.

Would you like to create a living trust and then regret it? If so, then choose the irrevocable trust.

The differences between Revocable vs. Irrevocable Trusts are drastic. The trust consumer should be very well informed and contact an experienced estate planning lawyer.

Would You Like a Free Consult With an Estate Planning Attorney in California?

If you wish to speak with an experienced estate planning lawyer, please contact online or call us directly at (951) 587-3737. Ironclad Living Trusts is honored to serve clients throughout all of Southern California.