By: John P. Napolitano, CFP®, CPA, PFS, MST

When it comes to implementing an estate plan, the word irrevocable is a common part of the discussion. While it may sound scary to do anything irrevocable, in estate planning there are several instances where it may make sense.

The first of these may be for asset protection purposes. When assets are left outright to heirs, the assets are free for the heirs to do whatever they want. While that may make sense sometimes, let me highlight a few situations where it may not be optimal.

Let’s suggest that your daughter has three great kids and an OK-to-problematic spouse. Leaving your assets outright to your daughter may result in them becoming jointly owned with your son-in-law. If your daughter prematurely passed, the assets are now solely owned by your iffy son-in-law, and not your grandchildren.

If your assets were left to your daughter through a trust which becomes irrevocable upon your passing, the assets would be under the control of a trustee of your choosing for the benefit of your daughter and grandkids only. That trustee could be a professional or another trusted family member. You may even build the ability for your daughter to change trustees should a falling out occur later in life between the trustee and the beneficiaries. The trust may have fairly liberal terms to allow for distributions for the beneficiaries at the trustee’s discretion. But to maintain the asset protection desired, it may be best if the assets in those trusts are not used for day to day living.

Another area where irrevocable may be wise is with life insurance. Life insurance owned or controlled by the insured is often includable in a decedent’s estate. Whether the policy would be subject to estate taxes depends on the size of the policy and the estate. For federal purposes, the death tax threshold is $11.58 million per individual. In MA, the death tax begins when assets (including the death benefit of owned life insurance) reaches $1 million per decedent. However, if the life insurance policy is owned by an irrevocable trust with an independent trustee other than the insured, the policy may avoid being included within the insured’s estate for tax purposes. There are other nuances regarding the governance of the trust and how the money gets to the trust to pay the premiums, but they’re fairly simple and administrative in nature.

Irrevocable also makes sense with respect to gifting interests in a business or investment real estate to minors. To avoid or reduce estate taxes, many wealthy families tend to wait too long in making gifts to the next generation. If minority interests in businesses or business real estate were gifted through an irrevocable trust or other entity, the assets may be protected from creditors of the minority owners and preclude your minority owners from blowing the money, impacting the management or operations of the underlying business, or receiving any distributions from the business or the trust.

 

This information is not intended to be a substitute for specific individualized tax advice. This information is not intended to be a substitute for individualized legal advice. John Napolitano, US Financial Advisors, US Wealth Management and LPL Financial do not provide legal or tax advice or services. Please consult your legal or tax advisor regarding your specific situation.

John P. Napolitano CFP®, CPA is CEO of US Wealth Management in Braintree, MA. Visit JohnPNapolitano on LinkedIn or uswealthnapolitano.com. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial, Member FINRA/ SIPC. Investment advice offered through US Financial Advisors, a Registered Investment Advisor. US Financial Advisors and US Wealth Management are separate entities from LPL Financial. He can be reached at 781-849-9200.   1-05067682 (10/30/20)