Louisiana Irrevocable Trusts Explained:
Irrevocable trusts are living trusts that are created during the grantor’s (or settlor’s) lifetime and which cannot be changed or revoked like a revocable trust. They are essentially contracts with yourself. A trustee is appointed to manage the assets on behalf of the beneficiaries. While grantors often appoint themselves as the initial trustee in revocable trusts, they lose many of the benefits of an irrevocable trust if the trust is “self-settled”. Thus, a third-party trustee should be appointed.
The purpose of an irrevocable trust is to move the assets from the grantor’s control to that of the beneficiary(ies). Once those assets are in an irrevocable trust, they no longer belong to the grantor but rather to the trust. This reduces the value of the grantor’s estate in regard to estate taxes and protects the assets from creditors.
Irrevocable trusts cannot be modified, amended, or terminated without the permission of the named beneficiary(ies) or by order of a court. The grantor legally removes all of their rights of ownership and control to the assets and the trust. Per La. R.S. 9:2041, living trusts are considered irrevocable unless expressly designated as revocable in the trust document.
Irrevocable trusts are generally set up to minimize estate taxes, access government benefits, and protect assets from creditors. This is different than a revocable trust, which allows the grantor to change or revoke the trust but has different benefits. Irrevocable trusts are not just for the wealthy. They are commonly used by people of all income and asset levels for asset protection, to prevent nursing home poverty, and for tax planning purposes.
Advantages of Irrevocable Trusts:
Asset Protection:
Since control and ownership of the assets is given up, creditors can no longer go after assets in an irrevocable trust.
Taxes:
Because the grantor no longer owns any asset in the irrevocable trust, it cannot be taxed when he or she passes away.
Medicaid:
In order to be eligible for Medicaid, there are strict rules about income and asset levels. An irrevocable trust can help lower taxable income. Its creation also triggers the five-year lookback period.
Disadvantages of Irrevocable Trusts:
Loss of Control:
The downside of an irrevocable trust is that the grantor no longer owns anything in the trust. Once established, the grantor cannot change or revoke an irrevocable trust. Assets in an irrevocable trust are no longer under your direct ownership, making it challenging to access funds if needed.
Making amendments to an irrevocable trust can be complex and often requires the consent of all beneficiaries. The terms of the trust, once set, cannot be easily modified, potentially causing unintended consequences in the future. Changing circumstances or unforeseen events may render the terms of the irrevocable trust less suitable over time, limiting the trust’s adaptability.
Taxes:
Transferring assets to an irrevocable trust may trigger gift taxes, and the trust itself may be subject to separate tax filings. Further, assets transferred to an irrevocable trust may not receive a step-up in basis upon the grantor’s death, leading to increased capital gains taxes for beneficiaries.
Cost:
Establishing and maintaining an irrevocable trust can involve significant legal fees and ongoing administrative expenses.
Trustee Disputes:
Conflicts may arise between beneficiaries and trustees, especially if the trustee’s decisions are perceived as unfavorable.
New Orleans Estate Planning Attorneys:
We are a Gretna law firm that has served the New Orleans area since 1980. Our estate planning lawyers are well versed at creating irrevocable trusts. We can analyze your circumstances to determine whether an irrevocable trust is right for you and help guide you through the process. We take pride in offering a personal and trusted experience. Call us today for a free consultation and find out why so many of our clients come back to us.
