You're deciding how to leave your estate to your heirs, and you've heard about an irrevocable trust, but you haven't really looked into it. You're curious about the advantages, disadvantages, and legal steps you'll need to take.
This is a great place to start. Far too many people don't spend nearly enough time researching all of their estate planning options. You don't just have to write out a will or leave all of your money to your kids or hope your heirs can figure it out on their own. You have tons of options, and it's absolutely worth considering all of them to find out which ones are best for you.
With that in mind, there are four main advantages to using an irrevocable trust.
1. You can have more control over the taxes.
Getting a direct gift from a substantial estate, for your heirs, means paying taxes. With a trust, you can sometimes reduce the tax hit or at least create more control over the way taxes get paid. For example, you may be able to set things up so that the income from the trust is tax deferred. Those taxes only kick in when the beneficiaries get distributions from the trustee. This provides flexibility and advantages for your family.
2. Keeping the money out of a divorce.
One of your children got married and you don't think it's going to last. You're worried about giving a direct gift because you think that the spouse may come after the money during the divorce. The trust can keep this from happening. For instance, if the trust pays out $50,000 per year, the full amount in the trust that hasn't been paid out isn't in your heir's estate.
3. You can keep the income.
Maybe you like the idea of a trust, but you don't want those assets to fully pass from your control and into the trust. The money in the trust is going to earn income, after all. It is possible to set the trust up so that the income goes to you, even though the main fund stays within the trust to get distributed upon your passing. With a sizable trust, this gives you the ability to get everything in place and still keep useful retirement income.
4. Deciding how your heirs use the money.
Perhaps the greatest benefit of a trust is that you can chose how the money is used by your heirs. This protects the estate if you fear one heir will waste the money, and it allows you to focus on promoting the things that are important to you, such as starting a business, buying a home, or going to college.
These are not all of the advantages of a trust, but they help you see how useful it may be. It is one of many estate planning options that help with the transfer of assets.