Do you have creditors chomping at the bit to get a piece of your hard work? Effective estate planning provides pathways to protecting your money and assets from those creditors with a heavy emphasis on the word effective.
The structure of your estate plan will dictate the capabilities and benefits. We advise clients to move assets into trusts as opposed to leaving the management and distribution up to a simple will, but this opens up questions about the best type of trust for your situation.
Revocable vs. Irrevocable Trusts
There are numerous types of trusts, but they will all fall under the umbrella of being either revocable or irrevocable. Both of these options protect your estate from the probate process when effectively established and fully funded. They also allow you to set up guidelines that must be met before your children or loved ones can inherit assets – protecting what you worked hard to build from immature children who need time to learn how to manage assets on their own.
The biggest difference between these two is that the terms of a revocable trust can be changed by the trust creator, while the terms of an irrevocable trust cannot be changed (without court approval and even then, it is limited).
Another big difference is the flexibility (or lack thereof) to transfer assets to and take assets out over time.
In a revocable trust (often referred to as a living trust), you are permitted to transfer assets into and take assets out of the trust as you please. This gives you the freedom to manage and sell assets during your lifetime along with making regular changes to your plan, and without any tax headaches.
In an irrevocable trust, as you likely guessed, with most irrevocable trusts you are not able to take assets out once they have been placed into the trust (unless you get approval from the trustee or the courts). This locks your plan in place for your lifetime (and potentially longer depending on the details of the trust), but you may still use and benefit from the assets held within an irrevocable trust just the same as you would with a revocable trust with some types of irrevocable trusts.
Avoiding Creditors and Taxes Through Trust Planning
Among the most important considerations of any estate plan will be how your plan works with your financial and tax strategies. Revocable trusts do NOT allow you to exclude assets from your taxable estate or from creditors who pursue your hard-earned money and assets. Irrevocable trusts, however, will almost always allow you to exclude certain assets from your taxable estate and from creditors looking to make claims against you.
This makes sense because, in a revocable trust, you could easily move assets into the trust, settle debts owed to creditors at a lower rate, and then remove the assets for your own benefit. The same can be said for the calculation of estate taxes and tax exemptions – essentially, you would be evading taxes instead of effectively planning for lower taxes in the first place. Irrevocable trusts protect you from creditors and taxes because you are no longer in full control of those assets and never will be. You cannot remove them (absent extreme circumstances) once you have resolved issues with creditors.
As we previously covered, an Intentionally Defective Grantor Trust is a type of irrevocable trust that provides additional financial benefits – one of a number of irrevocable trusts that serve a similar purpose.
Get the Most Out of Your Estate Plan
Our team believes in cohesive planning that accounts for your circumstances and gets the most out of the money and assets you worked hard to build. Effective estate planning goes hand-in-hand with effective financial and tax strategies.
Contact the Law Offices of Tyler Q. Dahl to make sure your plan is not only doing what you need it to do but also saving you from creditors, taxes, and children who aren’t ready to take on assets.
Dahl Law Group
