Irrevocable trusts are not to be treated lightly and you should proceed with careful planning assisted by a North or South Carolina Trust attorney when contemplating transferring assets into an irrevocable trust. The main feature of an irrevocable trust is a trust that you, as the “Settlor,” cannot change or revoke, which why these trusts are commonly called “irrevocable.” On the other hand, a “revocable” trust is one that the Settlor can continuously amend, change, or revoke.
Common Types of Irrevocable Trusts
- Irrevocable Life Insurance Trust (ILIT)
When such an irrevocable trust holds a life insurance policy, usually on the grantor’s life, it is called an irrevocable life insurance trust. If properly drafted and implemented, an ILIT can help minimize estate taxes and provide a source of liquid funds to your estate for the payment of taxes, debts, and expenses. While life insurance proceeds generally pass tax free to a beneficiary, they do not escape the Estate Tax if the decedent had a taxable estate.
- Domestic Asset Protection Trust
A Domestic Asset Protection Trust (“DAPT”) is an irrevocable trust established under the laws of certain states that allow for self settled spendthrift trusts. These allow the grantor of the trust to be a discretionary beneficiary, while still shielding the trust assets from the creditors of the grantors. Only 12-13 jurisdictions allow DAPT and a trust must be drafted under the laws of one of these states to offer protection for the grantor.
- Irrevocable Income Only Trust
An irrevocable income only trust is typically a trust which pays trust income to the Settlor or Settlor’s spouse and principal is held in the trust estate. Transfers to irrevocable trusts are subject to strict scrutiny. When using this type of trust to qualify for Medicaid or Asset Protection, the following restrictions apply:
- 5 year look back period same for trusts and outright gifts
- Transfer of property to the trust is not a taxable gift if limited power of appointment is retained
- Requirements for this type of Trust is that it must be the following:
- Must have a disinterested trustee,
- Mandatory distributions of income, and
- No trustee discretion to distribute principal
What to do now?
If you would like more information about how to incorporate an irrevocable trust into your estate planning and whether an irrevocable trust is right for you, please contact Nosal & Jeter, LLP at (704) 608-3429 or E-mail firstname.lastname@example.org to set up an appointment with our skilled Charlotte, NC and Fort Mill, SC estate planning lawyers