Pros and Cons of Irrevocable Trusts

There are many different types of trusts, and one of the more popular ones is an irrevocable trust. When deciding between a revocable or irrevocable trust, it’s important to know their pros and cons. While both types offer benefits, they also come with their own set of drawbacks. The estate planning attorneys at Lermitte & Lubin, LLC will break down the pros and cons of irrevocable trusts in Pennsylvania, allowing you to make an informed decision about your estate planning needs.

What is an Irrevocable Trust?

An irrevocable trust is a type of trust where the grantor (the person creating the trust) relinquishes all control and ownership over the assets they place within it. Once established, the terms of an irrevocable trust cannot be changed, amended, or revoked. This means that the assets placed within the trust are no longer considered part of the grantor's estate and are not subject to estate taxes upon their death. Estate taxes are one of the most important reasons people consider irrevocable trusts.

The Impact of Estate Taxes

Estate taxes can significantly reduce the value of an inheritance, and when you work your entire life to build something for yourself, you want what you leave behind to go to loved ones, not the state. In a scenario without an irrevocable trust or trust of any kind, the assets within an estate are subject to Pennsylvania’s taxes upon your death. The tax rates can be quite steep on their own, let alone when they’re doubled up. Federal estate taxes can reach up to 40% on estates valued over the federal exemption amount. While Pennsylvania does not have a state estate tax, it does impose an inheritance tax, which serves the same purpose conceptually. Inheritance taxes can be anywhere from 0 to 15%, depending on who is receiving your estate taxes. By transferring assets into an irrevocable trust, they are removed from your taxable estate, thus potentially saving substantial amounts in taxes. However, it's crucial to note that the transfer of assets into an irrevocable trust is considered a gift for tax purposes and, depending on the value of the assets, may prompt a federal gift tax.

Pros and Cons of Irrevocable Trusts

Pros of Irrevocable Trusts in Pennsylvania

1. Asset Protection: One of the biggest advantages of an irrevocable trust is that it provides a level of protection for your assets. Since the assets are no longer considered part of your estate, they cannot be seized by creditors, claimed by unintended inheritors, or used to pay off any outstanding debts.
2. Tax Benefits: As mentioned earlier, placing assets within an irrevocable trust removes them from your taxable estate. This can help reduce the overall tax burden on your loved ones after you pass away.
3. Medicaid Planning: Irrevocable trusts can also be used for Medicaid planning purposes. By placing assets within an irrevocable trust, they are not counted towards your or the trustee’s (trust’s recipient) assets and can help them qualify for Medicaid benefits.
4. Avoid Probate: Unlike a will, which must go through probate court, assets in an irrevocable trust can pass directly to beneficiaries without the need for court involvement. This can save time and money for your loved ones after you pass away.

Cons of Irrevocable Trusts in Pennsylvania

1. Loss of Control: Once assets are placed within an irrevocable trust, they are no longer under the control of the grantor. This means that they cannot be accessed or used for the grantor's benefit. This loss of control can be a major drawback for some people. There are special irrevocable trusts that can be accessed for specific reasons, such as Medicaid planning for example.
2. Inflexibility: As the name suggests, an irrevocable trust is unable to be amended or revoked. This lack of flexibility can become problematic if circumstances change and modifications to the trust are needed.
3. Gift Tax Consequences: When creating an irrevocable trust, the assets transferred are considered gifts and may be subject to gift taxes. This could potentially reduce the grantor's lifetime gift tax exemption, which can range from 18% to 40% and can take an experienced attorney to drastically reduce the gift taxes.
4. Set-Up Costs: Creating an irrevocable trust can be more expensive than a revocable trust due to the legal and administrative fees involved in establishing the trust.

Contact the Estate Planning Attorneys at Lermitte & Lubin, LLC

As with any estate planning decision, there are pros and cons to consider when choosing between a revocable or irrevocable trust. While an irrevocable trust provides asset protection and tax benefits, it also comes with a loss of control and inflexibility. It's important to consult with a knowledgeable estate planning attorney to determine if an irrevocable trust is the best option for you and your family. At Lermitte & Lubin, LLC., our experienced attorneys can help guide you through the process and create a personalized estate plan that meets your specific needs. Contact us today to schedule a consultation and protect your assets for the future.