When creating a trust, an important distinction is whether the trust will be revocable or irrevocable. In fact, this determination can have broad-reaching tax consequences and legal ramifications. In many cases, a properly created irrevocable trust will offer the benefit of tax savings and protection from creditors. However, in order to benefit from an irrevocable trust, it is essential that you be knowledgeable about how they operate.
A trust is a legal construct in which the trust creator transfer assets from their ownership into a trust which will be managed by a named trustee for the benefit of designated beneficiaries. This trustee will have legal title to the assets and will be responsible for protecting and managing them. When a trust is irrevocable, this means that under most circumstances, the trust assets cannot be removed and the trust generally cannot be changed by the creator. However, under some conditions, the trust creator may be permitted to receive income from the trust.
Beneficiaries named in the trust will typically have certain rights. These rights usually include being informed about the trust, to receive an accounting of the trust by the trustee, being paid income from the trust, and being able to petition to remove the trustee and terminate the trust. There can also be contingent or “qualified trust beneficiaries” who are those individuals who have an interest in the trust which they will not receive until after the primary beneficiary’s interest ends. These beneficiaries may have some or all of the same rights as the primary beneficiaries. The rights these beneficiaries will have is dependent on the terms of the trust as well as Michigan law.
While not having control over trust assets may be a downside for some, irrevocable trust offers many benefits for those seeking to gain tax benefits, control the future distribution, and protect their assets. For instance, when properly structured, an irrevocable trust can offer the benefit of providing a place to move assets which may prevent them from being subject to estate taxation. Further, under an irrevocable trust, the trust creator can determine how trust asset distributions will be made after their death with a greater degree of control that would be permitted through a will. Additionally, when properly devised, placing assets into an irrevocable trust will keep them from being considered for purposes of eligibility for income-sensitive programs such as Medicaid.
Determining which type of irrevocable trust is right for your circumstances can be complicated. Further, is important to ensure that the trust is properly prepared and in a manner which serves the creator and trust beneficiaries. Our office has experienced and knowledgeable estate planning attorneys who can help you explore your options and decide what tools are right for you. Please contact us online or by phone if we may be of assistance.