As you plan your Illinois estate, you may review your estate planning options and wonder which is best for you and your assets. You have several options, some of which are better than others. One such option is the irrevocable trust. The Motley Fool explores the pros and cons of irrevocable trusts and explains when such an estate planning tool may be right for you.
Irrevocable trusts are precisely what they sound like: trusts that cannot be undone once created. Once you place your assets within them, they are technically no longer yours. There are several types of irrevocable trusts, including a qualified personal residence trust and a grantor retained annuity trust, but the concept of each remains the same: anything you place within the trust is no longer yours to do with as you please. It is the property of the trust until your death, at which point the trustee will distribute the trust's assets in accordance with your wishes.
You may wonder why one would want to relinquish control over one's assets so thoroughly. There are four good reasons why.
Irrevocable trusts provide legal protection. If creditors or anyone else with a judgement against you attempts to collect on debts, they cannot go after the assets in your trust. This is because the assets in your trust are technically no longer yours.
Additionally, because the assets in the trust are no longer yours, they do not count toward the overall value of your estate. Estate taxes kick in on estates with values of $5.49 million or more. Estate taxes are a whopping 40 percent. If you own a sizeable estate, an irrevocable trust can help reduce the tax burden on your heirs.
If you should become ill and require in-home care, an irrevocable trust can help you qualify for benefits. By transferring your assets out of your ownership, you can qualify for Medicare and therefore avoid the depletion of your assets.
Finally, an irrevocable trust can help you prevent the misuse of your assets. With this type of trust, you can manage how the trustee distributes your assets regardless of if you are alive to control the distribution or not.
That said, the number one pitfall of an irrevocable trust is that it is permanent. If you change your mind and say, want to use the $5 million you placed in the trust for a wayward child to pay off substantial debt instead, you are out of luck. For this reason, when you create an irrevocable trust, you must be 100 percent certain of your intentions.
The information in this post is for informative purposes only. It is not legal advice.