Disadvantages of Irrevocable Trusts

Dave and Marge H. were interested in establishing an irrevocable trust. They had heard it might be a good estate planning option for them. However, they never considered the disadvantages of irrevocable trusts.

Basic Trusts

Trusts consist of at least one grantor, one trustee, and one beneficiary. After the grantor creates the trust, it must be ‘funded.’ The trust is just an empty vessel unless assets are transferred to it.

Generally, trusts can be either revocable or irrevocable. There are advantages and disadvantages to each kind of trust. In this article, we will take a look at three disadvantages of irrevocable trusts.

Loss of Control

When assets are transferred to a trust, the grantor no longer owns the asset – the trust does. However, the grantor of a revocable trust can directly control the assets.

Assets transferred to irrevocable trusts are no longer controlled by the grantor. More importantly, the trust assets are no longer part of the grantor’s taxable estate. However, the benefits of tax reduction may not be enough to balance the loss of control, and with a federal estate tax exemption in excess of $11 million per person, many people will not benefit at all, from an estate tax perspective, from the use of an irrevocable trust.

Complexity of Irrevocable Trusts

An irrevocable trust may be more complicated to establish than a revocable trust, making complexity one of the disadvantages of irrevocable trusts. Income tax, gift tax, asset protection, and estate tax issues must be thoroughly considered. Due to the complexity, the upfront costs of establishing an irrevocable trust will likely be higher.

Adding to the complexity is the number of irrevocable trusts available. Each has its own purpose:

  • Dynasty Trust – provides income to family members for generations.
  • Grantor-Retained Annuity Trust (GRAT) – may reduce taxes on gifts to family members.
  • Irrevocable Life Insurance Trust – usually manages proceeds of a life insurance policy.
  • Medicaid Asset Protection Trust – provides much-needed support while preserving the beneficiary’s Medicaid eligibility.

The characteristic all irrevocable trusts share is the difficulty in or inability to change the terms of the trust.

Inflexibility of Irrevocable Trusts

Irrevocable trusts are just that – irrevocable. Once the terms of the trust have been set, it’s very difficult and sometimes impossible to alter them without court intervention.

While irrevocable trusts offer many benefits, the inability to change the terms and beneficiaries of the trust can be unappealing.

Don’t Take a Chance with Something This Important.

John Mangan is an experienced Florida estate planning attorney who has been board certified in Wills, Trusts & Estates by the Florida Bar. At Law Offices of John Mangan, P.A., we help clients develop an estate plan that’s appropriate for their circumstances. Call us at 772-324-9050 to set up an appointment or use our Contact Form. With our office located in Palm City, we also assist clients in surrounding communities like Stuart, Hobe Sound, Jupiter, and Port St. Lucie.

Written by John Mangan, Esq.

John Mangan, Esq.

I’m an attorney in Palm City, FL, and I serve clients throughout Martin County, including Stuart, Palm City, Hobe Sound, and Indiantown, as well as those in St. Lucie County, the Treasure Coast, Palm Beach County, and other parts of Florida. The Law Offices of John Mangan, P.A., is an innovative firm providing estate planning services to clients in Florida. We focus primarily on wills, trusts, asset protection, guardianship, and probate administration.