Happy Sunday!

Hopefully you’re having a great weekend, even though the cold and rain of the season has appeared to settle in.

Have no fear, though, what I’m about to tell you about irrevocable trusts is sure to warm your heart. :)

A couple of weeks ago I did a newsletter about revocable trusts and the benefits (a lot) and costs (basically none) and someone asked me to do the same thing for irrevocable trusts.

Your wish has been granted.

So let’s just dive right in.

First, irrevocable trusts, as the name implies, cannot be changed once they are created.

Hence, a major cost of an irrevocable trust is its lack of flexibility.

Second, when you create an irrevocable trust, you, as the creator, are not allowed to be in charge of trust distributions or trust property.

Hence, a major cost of an irrevocable trust is loss of control.

Third, because you lose flexibility and control, your irrevocable trust is blessed with something pretty powerful, if it applies to you – asset protection.

Once these assets are placed into an irrevocable trust they cease to be yours. For that reason, if you are ever sued in the future, the assets in the irrevocable trust cannot be seized.

Fourth, because you lose control and flexibility, and technically, ownership of trust assets, those assets are no longer considered a part of your estate for estate tax purposes.

Translation – a benefit of irrevocable trusts is the estate tax advantages they supply.

Fifth, however, because any transfer to an irrevocable trust is treated as a gift to the trust (we won’t talk about sales to the trust – too complicated for this email), a cost related to income taxes rears its ugly head.

Anything you transfer into an irrevocable trust keeps the original tax basis of the purchaser. This means when it is sold in the future, capital gains tax will be calculated based on the original purchase price.

For example, let’s say you buy a house for $100k and when you transfer it into the trust it’s worth $1m.

You have removed $1m of assets from your estate for estate tax purposes, but if/when that property is sold inside of the trust, capital gains tax will be owed on anything over $100k.

Those are generally the benefits and costs of irrevocable trusts.

Now, who actually needs one?

In my opinion there are 4 groups of people that should consider irrevocable trusts:
1) People with over $15m in assets if single and $30m if married;
2) People with unconventional lifestyles (think drug dealers or professional gamblers);
3) People doing shady things they are likely to get sued for; and
4) People with over $5m in life insurance (this is a special type of irrevocable trust just for the life insurance – so the costs aren’t as impactful here).

If you think you need asset protection and you don’t fit those criteria I’m going to suggest you do a couple of things first (not in this order necessarily, and not all of them):
1) Create an LLC to hold some of your assets;
2) Purchase robust insurance to cover you in the unlikely event something happens.

Hope this all makes sense!

Have a great week!

Cheers,

Christopher Small
Owner
CMS Law Firm LLC

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