Happy Sunday!

Today I thought it would be fun to talk about irrevocable trusts. We hear about them from time to time as this estate tax and asset protection savior, and because they sound cool and kind of elite people want to have one.

Well, today you’re going to get a crash course in irrevocable trusts.

First, what is an irrevocable trust?

As the name implies, it is a trust that cannot be revoked (modified) once it is created.

Typically the trustee of the trust is not the person creating the trust. In a perfect world the trustee is an impartial third party.

Typically the beneficiary of the trust is not the person creating the trust.

There are some exceptions to this if the trust is created in some states, and Washington is not one of those states (we’ll talk more about this in a minute).

Once you put something into the trust, you usually can’t take it out unless you replace it with something of similar value.

Everything put into the trust is considered a gift, so you will reduce your lifetime giving amount if over $17k in a year (per beneficiary) and you will not get a step-up in tax basis when the trust creator dies.

Make sense?

Perfect!

Let’s talk about 3 reasons you want to create an irrevocable trust.

1. You are WAY over the estate tax limit.

Assets in an irrevocable trust are not counted as part of the trust creator’s estate.

For this reason, it can be helpful to move assets out of the trust creator’s name and into an irrevocable trust.

Although you may lose the step-up in basis, if you are facing the federal estate tax (45%-ish) it’s worth it (you’re paying 20% on the appreciation instead of 45% on everything).

Reminder, that estate tax number for individuals is anything over $14m. If you’re married it’s about $28m.

2. You have asset protection issues.

If you are not in the following professions you probably don’t need to worry about asset protection:

Drug dealer.

Casino owner.

Social media superstar that is highly controversial.

Any of the vices (gambling/pornography/alcohol).

That’s all I’m going to say about that.

Except… I’m not saying you shouldn’t have asset protection. I’m just saying it should be in an irrevocable trust. Lots of other ways to get there (LLC/insurance/etc.).

3. Your main asset is a house and you don’t want Medicaid to take it.

Again, most people don’t fall into this category, as you need less than $2k to your name to make this work.

With that being said, however, there are many elderly people whose main asset is their house.

An irrevocable trust, if created at the right time, can shield the house from Medicaid, allows the person to live in the house their entire lives, AND get a step-up in basis when they die (the Medicaid rules and estate tax rules don’t overlap exactly so this is possible).

That’s it.

Three reasons you should create an irrevocable trust.

Are there more?

Sure. But this will get you about 95% of the way there.

Have a great week!

Cheers.

Christopher Small
Founder/CEO
CMS Law Firm LLC

PS – don’t keep this estate planning stuff to yourself – you know it’s important and we LOVE referrals!