An irrevocable trust can provide you and your family with many legal and financial advantages — but they are also a serious commitment. Once an irrevocable trust is created, it can be extremely difficult or impossible to modify.
Because of this characteristic, it is of the utmost importance to work closely with a New Mexico irrevocable trust lawyer who can help you determine the best way to structure your trust in light of your intended goals.
New Mexico Financial & Family Law can help you create an irrevocable trust that provides you with the benefits you are most eager to receive. Whether you want to protect assets, reduce estate taxes, prevent misuse of the trust, or remove assets from your estate to qualify for public assistance, there are many ways that an irrevocable trust can help your family.
Schedule a no-obligation estate plan review and consultation with a New Mexico irrevocable trust attorney today when you call us at 505-503-1637 or contact us online.
Working with a New Mexico trust attorney is always advisable in any situation with long-term tax or estate implications. In the case of an irrevocable trust, these trusts are usually structured in a very specific way.
On top of that, the unchangeable nature of these trusts means that they should always be formed with care.
When you reach out to a New Mexico irrevocable trust lawyer, they will review your current estate plans, your overall financial portfolio, and the goals you intend to achieve. They may recommend an irrevocable trust if any of the following apply to you:
Note that, except for the last one, some of these benefits may be mutually exclusive. A trust that is capable of delivering on one may not provide other benefits on this list.
You may be able to create multiple trusts for multiple goals. The bottom line is that you must carefully consider your options before committing to any irrevocable trust arrangement.
New Mexico Financial & Family Law wants to help. Reach out to our experienced estate planning team to discuss forming an irrevocable trust and receive tailored recommendations on the best trust (or trusts) available to help you achieve your goals.
A trust is formed when the trust creator (grantor) transfers ownership of assets into the trust. The grantor will assign a trustee to manage the assets, and they will select beneficiaries to receive distributions of income or assets from the trust.
What makes an irrevocable trust unique is that it completely removes the grantor’s control, becoming its own separately managed entity. The trustee retains a higher level of responsibility over the trust since it is wholly up to them to interpret the rules for maintaining the trust and doling out transfers to beneficiaries.
In most cases, an irrevocable trust can only be altered if all beneficiaries unanimously agree to any proposed changes. The trustee then has to consider the request in light of the stated objectives of the trust, and then they can release funds or alter the trust if they consent.
A revocable trust can be altered or dissolved by the grantor at any time, often without the consent of their beneficiaries or trustee. Because of the grantor’s ability to access and control assets held in the trust, the trust’s property is still considered to be theirs for many financial and legal purposes.
The main benefit to a revocable trust is that assets can continue to be managed without any input from the grantor in the event that they die or are medically incapacitated. They also set up special rules for the trust’s property, including the ability to separate marital property or automatically create a testamentary trust when the grantor dies.
Unlike an irrevocable trust in New Mexico, revocable trusts do not protect assets from creditor claims, nor do they typically offer any tax advantages. Like an irrevocable trust, assets in a revocable trust still bypass probate.
In sum, a revocable trust is ideal for families that merely want to guarantee uninterrupted management of trust property, whereas an irrevocable trust is better for special purposes that require removing the property from the grantor’s ownership.
All testamentary trusts are irrevocable because they are only created after the grantor passes on.
The difference in terminology stems from the trust formation’s timing: an irrevocable trust is created during the grantor’s lifetime, whereas a testamentary trust is set up in advance but does not activate until the grantor dies.
Crucially, testamentary trusts do not bypass probate (with rare exceptions). If avoiding probate is one of your goals, creating a revocable or irrevocable trust in your lifetime is advisable.
Below, we have outlined some of the different types of trusts that have to be irrevocable in order to function as intended. Note, again, that these types of trusts are mutually exclusive, meaning most cannot serve dual purposes unless they are wholly converted to another type of trust at some point.
When assets are placed in an irrevocable trust, and the grantor does not have a guaranteed right to receive distributions from the trust, then creditors will have an extremely tough time accessing the trust’s contents. This arrangement is most helpful for individuals in professions with a high risk of lawsuits, including physicians, attorneys, and certain tradespeople.
An irrevocable life insurance trust names the trust as the policyholder and the beneficiary of all death benefits. This arrangement removes the value of the policy from the grantor’s estate while creating special instructions for the disbursement of policy benefits.
A charitable irrevocable trust splits proceeds and assets from the trust with other beneficiaries, which can include the grantor and must include at least one IRS-recognized charitable organization.
There are two main types of charitable irrevocable trusts: charitable lead trusts and charitable remainder trusts. A charitable lead trust pays an annuity to the charity and leaves the remainder for the grantor’s beneficiaries.
A charitable remainder trust follows the opposite order, paying an annuity to beneficiaries before the remainder is left to charity.
Both types of trusts can reduce income and estate taxes while also providing a charitable organization with a pre-designated donation.
A grantor-retained annuity trust is a special type of irrevocable trust in New Mexico that removes assets from the grantor’s control but still counts income generated from them as the grantor’s personal income. The grantor receives enough income from the trust to basically spend down the entire principal, leaving only the true appreciation in the value of the assets behind for beneficiaries.
This arrangement can substantially reduce gift taxes for highly appreciable assets, like real estate or volatile securities.
A personal residence trust places ownership of a home into a trust, usually with a family member listed as the beneficiary. The grantor retains the right to live in the home for a set period of time, which reduces its valuation for the purposes of IRS gift tax calculation.
A dynasty trust sets up distributions or annuities for beneficiaries in advance of the grantor’s death, which can eliminate the generation-skipping transfer tax (GSTT).
A Medicaid trust removes assets from the estate of the grantor while designating only a limited amount for use by the beneficiary. This arrangement can allow the grantor or their spouse to qualify for Medicaid long-term care benefits.
A special needs trust operates the same way, except the beneficiary can be anyone to whom the grantor wants to provide financial support, usually someone with disabilities who wants to maintain eligibility for Supplemental Security Income (SSI).
This type of irrevocable trust can provide the chance for a beneficiary to access their distribution immediately, which the beneficiary can decline. If the beneficiary declines this offer, they can claim distributions at a future date, which are not counted toward the grantor’s lifetime gift tax exclusion amount.
The tax implications of an irrevocable trust depend on the type of trust, its purpose, and how distributions are structured.
Any distributions intended for future use by beneficiaries may be taxed as their personal income or a gift. Gift taxes can count towards the grantor’s lifetime exemption amount unless the gift is offered as a “present interest” through a Crummey trust arrangement.
Grantor-retained trusts report annuities as the grantor’s personal income.
Any non-guaranteed distributions may count as income attributable to the trust itself. Non-grantor trusts have to file their own tax returns and pay taxes on income at a higher rate than most individuals.
Charitable irrevocable trusts, when properly structured, can lead to estate tax and income tax savings thanks to a discounted tax rate offered by the IRS.
A “step-up” in cost basis refers to an IRS policy that allows heirs to count the original (principal) price of an asset as its value at the time they inherited it. This arrangement eliminates all capital gains for tax purposes from the time the asset was originally purchased to the time it was transferred to a beneficiary.
Assets placed in an irrevocable trust can only receive a stepped-up basis if they are designated to be transferred at the time of the grantor’s death. This arrangement means that the transfer will trigger estate taxes instead of assessed capital gains in most instances.
Refer to a New Mexico irrevocable trust lawyer and a financial advisor to determine whether it is preferable to avoid estate tax or allow for a step-up on the basis of an asset.
It can be difficult to hold a trustee accountable if they are mishandling a trust. Since the grantor does not have the power to remove a trustee, the beneficiaries have to file a claim for breach of fiduciary duty to have the trustee removed or ordered to follow certain rules.
A grantor can avoid this situation by designating a trustee overseer. This overseer can evaluate the trustee’s performance in light of common law and the grantor’s original instructions.
If the overseer determines that a trustee should be replaced, they may nominate an appropriate replacement.
The future of your family and your legacy depends on the smart decisions you make now. With the help of our estate planning law firm in New Mexico, we can help you make the right choices with consideration for your goals.
If you want to see your family cared for in the future, avoid taxes, or protect the assets you care about most, reach out to our New Mexico irrevocable trust attorneys today. Schedule a confidential, no-obligation consultation when you call 505-503-1637 or contact us online.
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