When it comes to asset protection, irrevocable trusts are the best places to store your wealth, especially if you are trying to protect your estate from aggressive creditors or lawsuit plaintiffs. An irrevocable trust could be just what you need to keep your wealth safe for decades in the future while still allowing you and future beneficiaries to benefit from its assets.
However, the type of irrevocable trust you choose to set up can influence its defensiveness, accessibility, and other key attributes: all important factors for high-net-worth individuals to consider. Let’s break down the different types of irrevocable trusts in more detail.
Irrevocable Trusts Explained
An irrevocable trust is an unchangeable fiduciary vehicle that involves three key people or actors:
- The grantor, who sets up the trust and appoints the other two people
- The trustee, who manages the trust and handles any distributions
- The beneficiary(s), who receive assets from the trust according to the trust’s original documents and set up rules
With a normal or revocable trust, the grantor and/or all the beneficiaries can make changes to their trusts fairly easily. As an example, you might set up a revocable estate management trust, then decide to add someone else to the beneficiary list after the fact.
This sort of modification is impossible with an irrevocable trust (which is part of why it is so defensible). Once you set up an irrevocable trust, you can't change it except under limited circumstances (e.g., you and the beneficiaries all agree it's necessary, and you petition the court for a modification).
Irrevocable trusts are the primary tools we help you set up at Dominion. That's because, when they are drafted in an offshore jurisdiction, irrevocable trusts are effectively invulnerable to court attacks and creditor claims.
When you place assets in an irrevocable trust, you give up ownership of those assets. Then, since the trust can’t be changed by you or the beneficiaries, a court or creditor can’t demand that you take those assets and give them away or use them to pay bills or debts.
The assets remain safe and secure until they are distributed per your wishes. This is just one example of how an irrevocable trust could help you achieve your asset protection goals.
But that’s just one type of irrevocable trust. There are many trusts you might use, which can broadly be broken down into irrevocable living trusts and irrevocable testamentary trusts.
Irrevocable Living Trusts
An irrevocable living trust is an irrevocable trust that a grantor creates while they are still alive (and, in most cases, while they plan to take advantage of the trust and its distributions). Living irrevocable trusts can be broken down into several subsidiary types as well.
Irrevocable Life Insurance Trusts
Irrevocable life insurance trusts or (ILITs) are irrevocable trusts that hold life insurance policies on the original grantor’s life. Since the trust owns the policy, any death benefits are paid to the trust instead of the estate of the grantor, minimizing estate taxes and allowing the heirs of the grantor to receive the money with fewer hurdles, such as probate.
Most ILITs require the grantor to transfer a life insurance policy to the trust first, then make yearly gifts to pay for the required premiums.
Grantor-Retained Annuity Trusts
Grantor-retained annuity trusts or GRATs are also excellent tools for estate planning. Their purpose is to reduce the taxes on big financial distributions to living family members. The grantor places assets in a GRAT, but they still retain the right to receive the original asset value plus a rate of return from the IRS (called the 7520 rate).
When the term of the GRAT expires, any assets left over – such as the appreciated value of the original assets – are then distributed to the beneficiaries of the trust. Leveraged properly, this could be a smart way to give massive financial gifts to heirs while escaping significant estate taxes.
Charitable trusts are exactly what they sound like: trusts intended to provide regular distributions to charitable causes or nonprofit organizations. There are two types of charitable trusts you can set up:
- Charitable remainder trusts or CRTs. These let grantors donate assets to a charity while retaining the right to an income stream from the assets, so both parties benefit
- Charitable lead trusts or CLTs. These trusts are similar, but income streams go to the charity as long as the grantor is still alive. Any assets of the trust go to the heirs of the grantor when the grantor passes away
Medicaid trusts are specialized irrevocable trust instruments meant to help grantors qualify for Medicaid benefits while simultaneously protecting valuable assets.
By transferring ownership from the individual to the Medicaid trust, the trust takes ownership of valuable assets like money or real estate. Those assets then aren’t considered when determining the grantor’s eligibility for Medicaid and other government programs.
In this way, a grantor could potentially receive income from the trust (if they are a beneficiary) while still receiving income from Medicaid and other government supplements.
Qualified Personal Residence Trusts
Qualified personal residence trusts or QPRTs are special trusts meant to transfer ownership of a single primary residence to children or other future generations without that residence being subject to gift or estate taxes.
With a QPRT, the grantor transfers ownership of their primary residence to the trust for a certain amount of time. During that time, the grantor can still live in the residence. When the trust period expires, the ownership is transferred to designated beneficiaries, all without those beneficiaries having to pay estate or gift taxes.
Asset Protection Trusts
Asset protection trusts are, as we broke down earlier, trusts intended to protect the assets of high-net-worth individuals such as yourself. They do this by transferring ownership of valuable assets like liquid capital or real estate to the trust, so creditors and lawsuit plaintiffs can't demand that you turn over those assets or their monetary value for whatever reason.
Domestic asset protection trusts aren't as defensive as their offshore counterparts. That's because offshore asset protection trusts are subject to different rules and laws (since they aren't based in the US).
If you work with Dominion, your offshore asset protection trust will be perfectly crafted to guarantee long-term defensiveness plus generate income through smart investments.
Testamentary trusts are any trusts established alongside a last will and testament. Unlike living trusts, these only apply or start to take effect after the grantor passes away.
As an example, you might write your last will and testament to ensure that your estate is managed and passed down properly. Your will could contain instructions needed to establish a testamentary trust in your name. It will include all the details for the irrevocable trust, like the trustee and any beneficiaries.
Technically, the testamentary trust doesn’t become a real fiduciary arrangement or vehicle until your death or until your will applies. But you set up the details of the testamentary trust well ahead of time.
Many testamentary trusts are irrevocable on purpose to prevent modifications or changes to their terms that the original grantor would not want. Think of testamentary trusts as irrevocable instruments you can use to ensure that your estate is managed according to your desires when you’re no longer able to oversee it personally.
How to Know Which Type of Irrevocable Trust is Right for You
Since there are many different types of irrevocable trust you can set up, it’s a good idea to speak to trust experts at Dominion.
When you get in touch with one of our advisors, we’ll discuss your short and long-term financial goals and explore what different trusts can do for you.
With our assistance, you’ll set up the ideal irrevocable trust in the perfect jurisdiction to help protect your assets from legal threats, mismanagement from beneficiaries, and other possible harms.
Remember, asset protection – and wealth management in general – is a highly individualized process. Each type of irrevocable trust is meant for a different purpose, so you should think of these vehicles as precision instruments instead of generalized solutions.
Dominion can set you up with the best instrument based on your goals, finances, and other factors.
Get in Touch with Dominion Today
At the end of the day, you don’t need to decide which type of irrevocable trust is right for your needs and estate plan. As a high-net-worth individual, you can rely on the experts at Dominion to do all that heavy lifting for you.
We're licensed, specialized financial and legal advisors who have all the infrastructure and personnel needed to draft and manage an irrevocable asset protection trust for you. We offer premium asset protection and management services to business owners and other advanced professionals like you.
With our help, you’ll choose the right type of irrevocable trust for your specific needs, plus set up that trust in the ideal jurisdiction that insulates it effectively against US courts and creditors. Get in touch with one of our representatives today to learn more.