Do I Need an Irrevocable Trust?

We are often asked by potential clients whether it makes sense to create an irrevocable trust. An irrevocable trust is a trust that is set up for a specific purpose and cannot be undone under most circumstances. Therefore, it is a permanent trust until the trust purpose has been fulfilled and it can be closed out. The vast majority of people do not need irrevocable trusts, but for some, they can be extremely beneficial. There are two main purposes of establishing an irrevocable trust, namely creditor avoidance and tax avoidance.

Irrevocable Trust Creditor Avoidance

An irrevocable trust can be used to shield assets from potential creditors, but it is very difficult to do so and is fraught with peril. The idea here is that a person can establish an irrevocable trust where the trust grantor is neither the trustee nor the beneficiary. Any assets placed into the trust are considered gifts upon transfer to the trust beneficiary.

There are some big caveats:

1. The establishment of the trust and any transfers into the trust cannot be done to avoid a known creditor. For instance, if you owe a credit card company a large bill and they are suing you, you cannot create an irrevocable trust and fund it to avoid paying that credit card bill. This is what is known as a fraudulent conveyance, and will be undone by the court and the money seized. A fraudulent conveyance of this nature may also be seen as a criminal act. Avoid doing this at all costs.
2. Transfers of assets into the trust will be subject to look-back periods for creditor lawsuits and bankruptcy purposes.

Due to these caveats, the only situation where it would make sense to establish an irrevocable trust to avoid potential creditors is if there are no known creditors on the horizon and you have sufficient assets both in the trust and outside of the trust to avoid any creditor issues for an extended period of time.

Establishing such an irrevocable trust is also frowned upon by Illinois caselaw. Illinois doesn’t provide for what are known as Domestic Asset Protection Trusts (DAPTs). Some states, such as Nevada, do permit DAPTs. Some Illinois residents consider establishing a DAPT in Nevada and funding it. Current caselaw suggests any transfers into other state’s DAPTs if you are a resident of Illinois may be undone by the court. Therefore, establishing a DAPT as an Illinois resident may also be a poor choice in the long-run.

Irrevocable Trust Tax Avoidance

Some people consider creating irrevocable trusts to avoid both the State and Federal estate tax. Illinois has an estate tax, with current exemptions in 2021 at $4 million per person. If your assets exceed that amount your estate will be subject to the estate tax upon your death. The Federal estate tax provides for an $11.7 million exemption in 2021. For Federal purposes, lifetime gifts that do not exceed the annual gift tax exemption limit ($15,000 in 2021), are not counted against the estate exemption. Therefore, it may make sense to create what is known as an Irrevocable Life Insurance Trust (ILIT). To create an ILIT, a person establishes the trust instrument and then gifts money into the trust. The trust purchases a life insurance policy that pays out upon the grantor’s death. The grantor annually funds the life insurance trust with gifts so that the trust may continue to upkeep the life insurance policy. Annually the trustee must send out Crummey Notices (notices that the gifts are made into the trust and available for withdrawal to the beneficiaries). If all is done correctly the life insurance proceeds in the trust will not be considered part of the grantor’s taxable estate upon death. This is a way to reduce cash in the estate (by paying premiums on life insurance), while providing for a sizeable life insurance payout tax free. ILITs only make sense then when a person’s assets exceed the estate tax exemption.

Contact the Lake County Irrevocable Trust Attorneys at JTLG LLC Today

If you are interested in discussing irrevocable trusts, contact the irrevocable trust lawyers at Johnston Tomei Lenczycki & Goldberg LLC today. We offer a no charge initial consultation where we will understand your assets, your family, your estate plan goals, and then recommend your best planning options. We take a holistic approach to estate planning, and will consider all planning documents available, including irrevocable trusts if the need arises. Call us today at 847-549-0600 to schedule your free initial consultation.