Board Certified in Estate, Trust and Probate Planning
Today’s Topic: Irrevocable Trusts and Their Uses
In past articles we have discussed some of the foundation blocks of creating trusts. Primarily we have explored revocable trusts. A revocable trust (sometimes referred to as a living trust) is generally a trust over which the Grantor (person making the trust) has relinquished no control. The grantor may freely transfer assets into the trust during his lifetime and may also remove the assets from the trust. The grantor may amend or terminate the trust at will. If a grantor wishes, a revocable trust during the lifetime of the grantor may carry the grantor’s social security number for tax identification purposes. There are usually no tax consequences when a grantor transfers assets into a revocable trust which he or she controls.
As there are generally no transfer tax consequences to the grantor in transferring assets into a revocable trust as the grantor continues to retain complete control of any asset placed into a revocable trust, the grantor usually has achieved no protection against his present or future creditors. A creditor of the grantor may in most instances collect against any assets the grantor has placed into a revocable trust which the grantor controls.
In addition, placing assets into a revocable trust does nothing to remove the asset from the estate of the grantor for Medicaid eligibility purposes. If a person wishes to become eligible for Medicaid assistance, all assets placed into any revocable trust must be divulged and counted as countable assets for Medicaid eligibility purposes as would any other assets the person had available to him or her.
Accordingly for many applications such as creditor avoidance and or Medicaid eligibility, revocable (living) trusts accomplish very little. The primary purpose of revocable trust planning is the avoidance of probate intervention during disability and after death. By placing assets into revocable trusts, a grantor transfers the titles of the assets to the revocable trust. The grantor maintains control of the assets in the trust and of the trust itself. However, by placing the titles to the assets he owns into a revocable trust, he makes those assets become titled trust assets. In Ohio trust assets are not generally subject to primary probate jurisdiction during the grantor’s disability or after the grantor’s death.
Now that we have defined what a revocable trust is, let’s turn our attention to what an “ir”-revocable trust is.
In short, an irrevocable trust is in format very similar to a revocable trust. Both entities have Grantors (persons placing assets into the trust). Both entities have Trustees (persons legally entitled to manage the trust assets during the term of the trust according to the applicable law and rules of the trust) and both entities have beneficiaries (persons who benefit from the trust during its existence and after its termination).
As stated, in a revocable trust the grantor loses no control of the asset by placing the title to the asset into the trust. The grantor may in a revocable trust may call the title to the assets back out of the trust and retitle those assets into his or her name individually or any other person’s name free of the trust.
In an irrevocable trust the grantor’s ability to completely control the asset after it is placed into the trust is oftentimes wholly or partially lost. When an asset is titled into an irrevocable trust, the grantor’s ability to thereafter control that asset and its subsequent distribution is greatly diminished and in many cases non-existent.
Since the grantor has lost control of the asset by placing it into an irrevocable trust, there may be and oftentimes is a transfer tax consequence to the grantor resulting from the grantor causing the asset to pass from his name into an irrevocable trust which the grantor no longer completely controls. If the transfer to the irrevocable trust was accomplished by a sale from the grantor to the trust, then the grantor may have a capital gains income tax to pay on the appreciation of the asset during the time which he or she held title to the asset in his or her own name.
If the grantor “gave” the asset to the trust (transferred for no value received or less than fair market value of the asset on the date of transfer) the grantor may either have to pay gift tax on the transfer or use part of his or her lifetime exemption of $5,340,000 available against the gift tax to avoid paying the tax.
In many cases irrevocable trusts involve persons (primarily beneficiaries) who are not grantors of the trust. In those cases the grantor may establish the irrevocable trust during his or her lifetime or upon death. Oftentimes revocable trusts which grantors establish during their lifetimes, become irrevocable trusts after the death of the grantor.
In this type of situation a beneficiary may find that he or she has certain abilities to enjoy the benefits of an irrevocable trust during their lifetime (i.e. income from the trust, certain limited or defined abilities to receive portions of the principal of the trust). However, these beneficiaries may discover that they have no ownership of the trust assets and may never be entitled to receive the assets from the trust in their own name. These beneficiaries may or may not be granted the right to name the persons they desire to become beneficiaries of the trust after their death.
As I have said and written many times before, it’s all about control, who controls the assets and who will have the ability to control the assets in the future. Irrevocable trusts are just one of many important planning tools which enable those planning their estates to maintain control of their assets during their lifetimes and after their death.
This article was written by David F. Bacon, Attorney and Ohio State Bar Association Board Certified Specialist in probate, trust and estate planning. David Bacon, Jeff Roth, and Jessica Moon are members in Roth & Bacon Attorneys, LLC with offices in Upper Sandusky, Marion, and Port Clinton, Ohio and Fort Myers, Florida. They have focused their practice to provide estate and business planning concepts to their clients. Nothing in this article is intended for, nor should be relied upon as individual legal advice. The purpose of this article is to help educate the public on concepts of law as they pertain to estate and business planning. Copyright @ David F. Bacon 2007