Understanding The Difference Between Irrevocable And Revocable Trusts In Connecticut
Estate planning is not just for the elderly. While it is crucial to give thought to your long-term planning needs, it is also important to think about your financial needs and your family’s needs as well. Do you have young children for whom you need to provide after you pass on? Do you have assets, intellectual property or investment accounts that you want to protect or leave to your children? Are you concerned about what would happen to your portfolio after you pass? What about estate and inheritance taxes? If you do not have a plan in place, state law dictates how your property is distributed. Without a comprehensive plan, you have limited control over asset distribution aside from terms stated in your will. However, forming an irrevocable or revocable trust may give you the flexibility or hands-off financial management approach you seek.
Another important attribute is that both irrevocable and revocable trusts avoid probate administration. This means that an inventory of your assets is not public information.
In certain instances, a trust can lessen estate tax liability. In Connecticut, inheritance tax ranges from 10.8 to 12 percent. In this state, the 2021 estate tax exemption is $7.1 million. In 2021, estates in excess of this estate tax exemption will pay a minimum estate tax of 10.8% up to a maximum of 12% of everything over that exemption. Typically, taxes must be paid before any distributions to beneficiaries or charitable entities can be made. For estates of all sizes, inheritance tax can be an unpleasant surprise for beneficiaries that might be avoided through the creation of a revocable or irrevocable trust.
Differentiating between trusts can be confusing, so it is important to consult with an experienced estate planning attorney to create a trust that fits your needs.
What are Revocable Trusts?
A revocable trust is one that is amendable and can be revised repeatedly. The grantor retains ownership over the assets and can also regularly contribute additional assets to the trust if desired. A revocable trust provides flexibility to the grantor if they are concerned about financial stability or liquidity in an emergency. Depending upon the grantor’s intentions, the income or interest gained on trust investments are paid directly to the grantor until their passing or another event stated in the terms of the trust.
What about Irrevocable Trusts?
Irrevocable trusts are formed to protect assets from the grantor’s creditors and estate taxes, in some instances. Why would the grantor not want free access to their own assets? To prevent creditors from getting access to the assets. Maybe they are looking into assisted living facilities but want to protect the vast majority of their estate from being subverted to pay the monthly bill. Perhaps they want to leave trust assets to children. Maybe they have an asset that will increase in value and they want to minimize potential estate tax liability before it does. Whatever the case, an irrevocable trust is a unique option that offers asset protection, but does come with a few caveats. For instance, the grantor cannot serve as the trustee, but they can appoint a trustee and successor trustee. In addition, an irrevocable trust cannot be terminated, amended or modified and funds cannot be withdrawn except by a beneficiary, which could be the grantor, and only upon the specific terms and conditions stated in the trust. Elderly adults and couples with long-term care planning anticipated, assets that may be in excess of the estate tax exemption, and/or no liquidity issues may prefer allocating funds to an irrevocable trust because it may provide better asset protection from prying hands and government taxation.
Contact an Attorney Today for Help
Forming a trust that is right for you and your family requires a thorough analysis of your finances and estate planning needs. Consulting with an experienced estate planning attorney is the first step. Canton estate planning attorney Brian S. Karpe has more than three decades of legal experience in addition to advanced training and a Master of Laws in Estate Planning and Elder Law. If you have questions about estate planning, irrevocable or revocable trusts, or need to revise your estate planning documents, he would be happy to assist you. Call today to schedule a consultation.