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Irrevocable trusts are permanent legal arrangements that allow people to transfer assets and give up direct financial control of them so that they can be protected from creditors, estate taxes, and legal judgments. Irrevocable trusts in Florida are popular instruments for reducing your estate tax burden, protecting your assets, and controlling how beneficiaries receive their funds.
Understanding Irrevocable Trusts
Creating an irrevocable trust is a serious decision. Under Florida trust laws, you must give up control over the trust property to a trustee, who assumes fiduciary responsibility for managing the assets and carrying out the purposes of the trust. Some of the benefits of irrevocable trusts include:
- Personal tax benefits. You can transfer appreciated assets into the trust, helping you save on capital gains taxes by shifting the income tax away from you and to the trust, which is its own entity with its own tax ID number and tax return. That said, irrevocable trusts don’t always avoid taxes entirely.
- Property ownership. Transferring property into an irrevocable trust means it no longer belongs to you, which can simplify the probate process for your loved ones upon your death. Owning fewer probate assets often reduces the time and expenses involved in the probate process.
- Asset protection. Property held within an irrevocable trust can be shielded from outside creditors, liens, and divorcing spouses.
- Long-term care. Grantors who move their assets into irrevocable living trusts may become eligible for Medicaid benefits if they go into nursing homes. However, there is a 60-month look-back period for Medicaid, so it’s important to establish the trust well before this issue comes up.
- Estate tax savings. Since the grantor does not own the property held in an irrevocable trust, it’s not included in tax calculations of the total value of their estate at the time of their death. The trust can thus reduce the value of a taxable estate, sometimes making the difference between paying hefty tax bills to the IRS and avoiding estate taxes completely.
There are also some drawbacks to irrevocable trusts. When you set up an irrevocable trust, you give up ownership of the assets held within it. Modifications to the trust can’t be made easily once it has been created.
Examples of Irrevocable Trusts
People create irrevocable trusts for all kinds of reasons. Some do so to shield homes from estate taxes. Others want to provide for the long-term care of disabled beneficiaries. Some of the most common examples of irrevocable trusts include:
- Bypass trusts. Also known as family trusts, these irrevocable trusts help families save on estate taxes in the Sunshine State. A bypass trust can also be used to provide income to a family member after your death and during your surviving spouse’s lifetime.
- Life insurance trusts. Irrevocable life insurance trusts own an individual’s life insurance policy during their lifetime. The trust then distributes the insurance proceeds when the grantor passes away, which can have large tax savings benefits.
- Special needs trusts. People with disabilities need to qualify for government assistance. Setting up a special needs trust can help pay for their needs without making them ineligible for further assistance.
- Spendthrift trust. This estate planning tool helps protect beneficiaries from wasteful spending that could rapidly exhaust a trust’s assets.
- Charitable trusts. Charitable trusts provide money or other assets to charitable institutions. These can be established by the grantor or the court, which must determine a charity that is in keeping with the grantor’s intent when establishing the trust.
Around 34% of ultra-high-net-worth individuals use irrevocable trusts for asset protection and estate planning, but you don’t have to have a high net worth to become a grantor. If you have assets that need to be protected or want to control how beneficiaries receive access to the funds you leave them, those are compelling enough reasons to contact a trust attorney.
FAQs
Can I Still Live in My House if I Put It in an Irrevocable Trust?
Yes. You can still live in your house if you put it in an irrevocable trust as long as the trust document includes a specific right-to-occupy or life estate provision. The house becomes the legal property of the trust, but you retain the right to live in it rent-free. You may still be required to pay for ongoing expenses like property taxes, homeowners’ insurance, and routine maintenance costs out of your own pocket.
Who Cannot Be the Trustee of an Irrevocable Trust?
The grantor cannot be the trustee of an irrevocable trust if you want to maintain tax and asset protection benefits. Serving as your own trustee keeps the assets under your control, which eliminates benefits such as creditor protection, Medicaid eligibility, and estate tax exclusions. If tax planning requires an independent trustee, appointing a subordinate party, such as an employee or certain family members, can also compromise the trust’s legal standing.
What Can’t You Do With an Irrevocable Trust?
You can’t freely change, cancel, or take back assets from an irrevocable trust after it is created. Changing the rules or reclaiming your property requires permission from either all beneficiaries or a court. You can’t control assets held in the trust directly, either. A trustee must handle the property. You’re also not allowed to use trust money to pay everyday expenses and cannot transfer retirement accounts into the trust without triggering taxes.
What Is the Five-Year Rule for Irrevocable Trusts?
The five-year rule for irrevocable trusts is a Medicaid look-back period, which stipulates that any assets transferred into an irrevocable trust within 60 months of applying for Medicaid long-term care may trigger a penalty period of ineligibility. If you placed assets into an irrevocable trust more than five years ago, they are hidden from Medicaid and do not count against your eligibility limit.
Hire a Trust Lawyer Today
If you’re considering setting up an irrevocable trust in Florida, you should hire a trust lawyer right away. The team at the Law Office of Douglas A. Oberdorfer, P.A., is here to help. We have been in practice for decades, and in that time, we’ve handled the creation and administration of countless irrevocable trusts for clients. We can handle your irrevocable trust case, too, helping you avoid common pitfalls. Contact our office to schedule a consultation.
