Creating your estate plan takes a lot of consideration. You have to be able to account for all your assets and lay out who should receive which ones. Some people choose to do this in their will because they think this will be simpler. While it’s true that it may be simpler at first, distributing all your assets via your will and the probate process can come with challenges for your loved ones after you die.
Another option that’s present is trusts. Trusts are categorized as either revocable, which means they can be changed, or irrevocable, which means they can’t be changed without court or beneficiary permission. The permanency of an irrevocable trust is concerning to some people, but it comes with considerable benefits.
What are the benefits of an irrevocable trust?
When you create and fund an irrevocable trust, a trustee manages the assets within the trust. You no longer have control over those assets. In exchange for giving up control to the trustee, the assets in the trust may gain protection from your creditors. This can be a highly attractive option for some Coloradoans. For instance, this protection can be crucial for someone with a career that comes with a high risk of being sued. Shielding your assets in this way means that you can pass more of your wealth along to your loved ones.
However, these benefits depend on the type and timing of the trust, how it’s funded, and complex rules such as fraudulent-transfer laws and Medicaid lookback periods. Creditor protection is not necessarily automatic. Further, creditor protection usually applies only when you create an irrevocable trust for other beneficiaries, not for yourself.
Another benefit of irrevocable trusts is tax savings. Colorado does not impose a state estate tax, but reducing the size of your taxable estate can still help for federal estate-tax purposes for high-net-worth individuals.
Privacy is another benefit of irrevocable trusts. The terms of the trust aren’t part of the probate proceedings, so there’s no public record of who’s getting what. Your beneficiaries may also be able to receive their inheritance sooner.
Establishing trusts as part of your estate plan requires precise planning and execution. It may be beneficial to work with someone who can guide you through the decision-making process and help you get everything set up properly.