What Does Irrevocable Really Mean?
“When it comes to implementing an estate plan, the word irrevocable is commonly part of the conversation. While it may sound scary to do anything irrevocable, in estate planning there are several instances where it may make sense.”
The Patriot Ledger’s recent article, “Sometimes irrevocable is good,” explains that the first situation where an irrevocable trust may be wise, is for asset protection purposes. When assets are passed outright to heirs, there’s no control, and heirs can do whatever they want. You may have a child that can’t handle her money. You may also have a son-in-law that you’re not crazy about. If you leave your assets outright to your daughter, they may become jointly owned with your son-in-law. If your daughter dies prematurely, the assets would be the sole property of your iffy son-in-law.
However, if those assets were left to your daughter through an irrevocable trust, the assets would be under the control of a trustee you select for the benefit of your daughter only. The trustee could be a professional or another trusted family member. You can even add terms in the trust that allow the daughter’s beneficiary to change trustees, in case there’s a falling out later in life between the trustee and the beneficiaries. The trust may include liberal terms to allow for distributions for the beneficiaries and others at the trustee’s discretion.
Another spot where irrevocable may be ideal is with life insurance, because life insurance owned or controlled by the insured may be include-able in the decedent’s estate. It depends on the size of the policy and the estate. For federal purposes, the death tax threshold is $11.18 million per individual. However, some states have their own estate tax. For example, in Massachusetts, the state death tax begins when assets (including the death benefit of owned life insurance) hits $1 million per decedent.
However, if the life insurance policy is owned by an irrevocable trust with an independent trustee other than the insured, the policy may not be included in the insured’s estate for tax purposes.
Irrevocable also makes sense, when gifting a business or investment real estate to children or minors. To avoid or reduce estate taxes, many wealthy families frequently delay in making gifts to the next generation.
If minority interests in businesses or business real estate were to be gifted via an irrevocable trust or other entity, the assets could be protected from creditors of the minority owners. This also precludes the minority from spending all the money, affecting the management or operations of the underlying business or getting any distributions from the business or the trust.
If you’re interested in an irrevocable trust, work with a seasoned estate planning attorney.
Reference: The Patriot Ledger (November 2, 2018) “Sometimes irrevocable is good”