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Irrevocable Trusts & Their Uses

| Nov 2, 2020 | Firm News

Do you know someone who has a child with special needs, such as down syndrome or autism? They may need to consider the creation of an irrevocable trust to protect that child. It allows an individual to make sure a person with special needs is provided for beyond public benefits, by giving them cash, real property, or other valuables that do not affect the calculation to receive public benefits.

An irrevocable trust is a type of trust that can only be changed by a court order once created and is normally created in conjunction with your estate plan. The impracticality of such a trust can outweigh the benefits it provides. Some examples of irrevocable trusts and their uses are as follows:

Special Needs Trust

A Special Needs Trust (SNT) is an irrevocable trust specifically designed to maintain an individual’s public benefits. For example, the parents of an autistic child may want to leave their child with additional funds that will not be counted against that child’s public benefits. Generally speaking, the amount of public benefits a person is entitled to decreases based on their income and assets. A SNT serves as a repository for monies or assets received while a person is on public benefits. The monies and assets held by the SNT are not counted as belonging to the individual receiving public benefits. This means that the parents can leave cash, real property, or other valuable assets for the benefit of their autistic child without jeopardizing that child’s needed benefits.

In order for a SNT to best function, a third party, i.e. someone other than the individual receiving the public benefits, needs to create and become the trustee of the SNT while naming the individual receiving the public benefits as the primary beneficiary. This Third Party SNT can then receive any funds or assets which would have otherwise reduced a person’s public benefits. In our scenario the parents of the autistic child would be the creators of the SNT and would name themselves as trustee with their child as the beneficiary. The parents can then fund the trust by placing assets into the trust. The beneficiary can then request funds as needed from the trustee and the trustee can choose to provide the funds, or not. The ownership and control of the trust assets by the trustee is the key to maintaining the public benefits. For example, the parents of an autistic child could use the SNT assets to purchase clothes or other needed daily items for their child, and once that child becomes an adult, they could pay the rent or other bills incurred by their child.

[YOU NEED A TRANSTION INTO THIS TAX PROTECTION – HOW ARE THEY CONNECTED?]

Tax Protection

There are two types of irrevocable trusts which provide increased tax protection: the Irrevocable Life Insurance Trust & the Irrevocable Bypass Trust.

The irrevocable life insurance trust (ILIT) is designed to own large life insurance policies so that the value of an individual’s estate on their death is not inflated by the value of the policy. As of October 2020, the federal estate tax exemption is $11,580,000, but that is subject to change. Individuals who are considering large life estate policies, and who own significant assets, may wish to consider an ILIT. The ILIT owns the policy not the individual, this prevents the value of the policy from being added to the value of a person’s estate, which either decreases or prevents federal estate taxes on the individual’s death. For example, say the parents of an autistic child take out large life insurance policies on their lives and desire to name their child, via the SNT as described above, as the beneficiary. The parents don’t want their estate to pay increased estate taxes as a result of these policies as they want to provide for their child as much as possible. Therefore, they create an ILIT to own the policies and pay out to the SNT on their death. This avoids or reduces their potential for estate taxes and provides for their child.

The irrevocable bypass trust is used to separate a married couple’s assets on the passing of the first spouse. The deceased spouse’s assets are placed in an irrevocable bypass trust so that the value of the deceased spouse’s assets is not added to surviving spouse’s estate. Like the ILIT, the irrevocable bypass trust is designed to reduce or prevent the surviving spouse from incurring federal estate taxes on their passing.

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All of the above irrevocable trusts serve specific needs. They require careful planning and should be created on the advice of a knowledgeable estate planning attorney working in conjunction with your financial advisor and tax planner. Here at Griswold, LaSalle, Cobb, Dowd & Gin, LLP, we have the knowledge and skills to create, implement, and maintain the irrevocable trusts described above. We work with you and your financial and tax professionals to determine if the creation of an irrevocable trust is the best solution for you and your current and future needs.

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