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Essential considerations before setting up an irrevocable trust

On Behalf of | Jan 20, 2025 | Trust Administration |

Establishing an irrevocable trust is not something you should rush into. Unlike a revocable trust, it’s difficult to change the terms of an irrevocable trust once it’s in place. As such, it helps to approach the process with clarity and intention.

First off, transferring your assets into an irrevocable trust means losing their control and ownership. This means you cannot access or manage those assets as freely as before since they belong to the trust. If you are uncomfortable with this arrangement, an irrevocable trust may not be the right choice.

What are you seeking to achieve?

There are different types of irrevocable trusts, and understanding your objectives can help you determine the best fit. Are you looking to protect assets from creditors, reduce taxes, qualify for Medicaid or provide for loved ones? Defining your goals will guide your decisions about how to structure the trust.

Who should manage the trust?

The trustee you choose to manage the trust will have significant control over the trust assets, which is why you should make the right choice. It could be a trusted family member, a professional fiduciary or a financial institution. Either way, ensure they have the experience, reliability and understanding to handle the responsibilities.

Weigh the tax implications

Assets in an irrevocable trust are not considered part of your taxable estate, which can save you a lot in estate taxes. However, there are tax implications to keep in mind. For instance, irrevocable trusts are treated as separate legal entities for tax purposes, and income generated by the trust assets is subject to taxes. Additionally, there may be tax consequences for transferring assets to the trust.

Seek informed guidance

Creating an irrevocable trust involves detailed paperwork, formalities and procedures that require careful planning. Mistakes can void the trust, cause complications or even ruin your estate plans. 

Having qualified assistance is crucial to navigating the complexities of transferring assets, drafting the legal document and ensuring the trust meets your unique needs. It can go a long way in making the most of these powerful estate planning tools.