Trusts provide important estate planning benefits. You can learn how to use one to accomplish your estate planning goals by contacting a probate and estate planning attorney for a consultation. In Shelbyville, Kentucky, the team at Berkley Oliver, PLLC, will listen to your needs to help you decide whether an irrevocable trust will best serve your goals.
What is a Trust?
Trusts give their creator the ability to control the use and distribution of their assets upon and following their death. They are variously described as contracts, fiduciary relationships, and legal entities, sharing characteristics of all these legal constructs without necessarily falling squarely within any one of them.
Nevertheless, the IRS and courts treat trusts as legal entities. They are created with written documents that transfer the assets into the trust and set the instructions regarding how to do so. The trust exists as a set of terms for handling property, similar to a contract.
In any case, trusts always involve these three parties:
- The grantor, who creates the trust by putting assets into it and giving it instructions; sometimes also referred to as the settlor, trustor, or donor;
- The trustee, who manages the trust by following the grantor’s instructions;
- The beneficiaries, who receive proceeds from the trust as authorized by the trustee and directed by the terms of the trust.
The trustee has fiduciary relationships with the grantor and beneficiaries, which means they must act in the latter’s best interests after the former’s passing, even if those interests conflict with their own. At the same time, the trustee manages the trust assets, pays taxes, and distributes property.
Irrevocable vs. Revocable Trusts
With everything above being said, not all trusts are created equal. An irrevocable trust also protects the trust’s assets from the grantor’s creditors during life and the IRS at death. But the price of that protection is a loss of control over the assets placed into the trust.
Irrevocable and revocable trusts differ in several other material ways, including:
Modification or Termination
A revocable trust can be modified or terminated by the grantor at any time and for any reason. The beneficiaries cannot stop the grantor, and the trustee must follow the grantor’s instructions to revoke the trust even if they conflict with the original trust instructions.
That said, “irrevocable,” while sounding like the polar opposite, is not as definitive as it sounds. On the contrary, Kentucky law gives the parties to a trust three ways of modifying or revoking an irrevocable trust.
First, the grantor and beneficiaries can agree to modify or revoke the trust. When all the parties agree, the law does not require a court order. Instead, the parties can handle the revocation without a judge’s intervention.
Second, the beneficiaries can agree to revoke an irrevocable trust. The parties must obtain judicial review of the revocation. A judge will only terminate the trust if continuation of the trust is not needed to achieve any of the trust’s material purposes.
Third, the beneficiaries can agree to modify the terms of an irrevocable trust. Again, a judge must review the modification, and the court will grant the modification if it is not inconsistent with any material purpose of the trust.
Asset Protection
When a grantor creates a revocable trust, they no longer own the trust assets. However, since the grantor can revoke the trust at any time, the law does not protect them from creditors.
The law treats the assets in an irrevocable trust differently. The grantor has effectively given up control over those assets to the trustee and cannot get them back without the beneficiaries’ consent. As a result, the law protects those assets from the grantor’s creditors.
Nonetheless, protecting assets from creditors is not always as simple as just transferring all your assets into an irrevocable trust. Transferring assets to an irrevocable trust when you owe a creditor can be legally problematic if you don’t retain control of enough property to satisfy that creditor. If Medicaid is the creditor in question, you would need to transfer your assets into an irrevocable trust at least five years (as of 2024) prior to requesting Medicaid to disregard those assets as a “resource” that would need to be used to cover the cost of a nursing home.
Taxation
The federal estate tax applies whenever a deceased person transfers assets to their heirs and devisees. Since the grantor can take back the assets in a revocable trust at any time, the IRS considers them the grantor’s assets when calculating the federal estate tax. In other words, revocable trust assets are subject to the estate tax when the grantor dies.
Irrevocable trust assets, on the other hand, have different characteristics from the grantor’s property. Specifically, the grantor does not control the assets and cannot regain control unilaterally. As a result, the IRS does not consider trust assets in an irrevocable trust to be part of the grantor’s estate taxable upon the grantor’s death.
How a Probate and Estate Planning Attorney Helps You
There is no one-size-fits-all plan for every estate. Instead, irrevocable trusts work better in some situations, while revocable trusts work better in others. That said, When you hire a probate and estate planning attorney from Berkley Oliver, PLLC, you partner with someone with extensive legal knowledge and practical experience.
We will listen to your goals and concerns and craft a custom solution for your estate. We’ll also draft your trust document and assignments, transferring your assets into the trust. From there, we will continue to advise you should you need to modify or revoke your trust.
Contact Our Probate and Estate Planning Lawyers Today
Trusts create complexity, but that complexity also gives them their power. Your trust can protect your assets while still distributing them according to your instructions. Learn more about trusts and how we can help you use them to accomplish your goals by contacting Berkley Oliver, PLLC, a probate and estate planning law firm in Shelbyville, Kentucky, today.