Is an Irrevocable Trust a Good Idea as Part of My Estate Plan?


Perhaps you’ve been told that having an irrevocable trust is a good part of your estate plan. Is that actually true? The (very lawyerly) answer is, it’s going to depend on your circumstances and what actually needs to happen.

 

 

The Basics of Irrevocable Trusts

 

Perhaps you’ve been told that having an irrevocable trust is a good part of your estate plan. Is that actually true? The (very lawyerly) answer is, it’s going to depend on your circumstances and what actually needs to happen.

When Do We Use Irrevocable Trusts

Now, there are two times we set up irrevocable trusts: while you’re still alive, known as an inter vivos trust, or we can set it up after you have passed, which is called a testamentary trust.

Now, typically we’re gonna set up testamentary irrevocable trusts for the benefit of our beneficiaries – we’re looking to have that trust set up later on for somebody who doesn’t necessarily need the assets. We’re not worrying about having to file a gift tax return or likely, an estate tax return.

Ultimately, a testamentary, irrevocable trust is there to own assets typically for young children who need somebody else to own those assets for them.

 

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Lifetime Irrevocable Trusts

Now, the other time that people think about an irrevocable trust is a lifetime, or inter vivos, irrevocable trust. We just don’t set up as many of them because most people don’t need it. It’s overkill for estate and gift tax planning reasons for most people.

It doesn’t mean things don’t ever line up and make these worthwhile, but it is going to be a more expensive thing for clients. Why? Because there’s a lot of work to set it up, we’re gonna have to file a gift tax return to report it, and there’s going to have to be a trustee who owns and manage assets.

But My Grandparents Had One!

Lifetime irrevocable trusts were set up a lot more in the past, and I will frequently get clients who say, “Well, my grandparents had a life insurance trust. I need one of those too.” Probably not for most of us. Having life insurance inside of an irrevocable trust while you’re still alive is just more planning than most people need. Doesn’t mean you don’t need it sometime in the future.

With the estate tax exemption coming down in 2026, we may change our minds on that, but for the vast majority of people setting up an irrevocable trust now to own assets generally is gonna be more planning than they actually need, and could cost more than it’s worth.


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