While most people are aware of the need to do estate planning to eliminate the cost of probate and reduce estate taxes through the use of revocable living trusts and pour-over wills, very few people are aware of the benefits of using irrevocable trusts as part of their estate planning strategy.

The benefits that can be achieved by receiving and retaining gifts and inherited assets in an irrevocable trust are significant. A person other than the beneficiary of the trust, including a spouse of the proposed beneficiary, can create and fund the trust. A perpetual dynastic trust can extend these enhancements for multiple generations. These enhancements fall into three categories:

1. The trust "shelters" inherited assets from the donee’s "predators."

Assets put into an irrevocable trust created and funded by someone other than the beneficiary are out of the reach of claimants against the beneficiary’s assets, including a divorcing spouse, creditors, and the IRS. Therefore, if someone transfers assets into an irrevocable trust for a beneficiary, the value of that transfer to the beneficiary is greater than an outright gift to the same beneficiary, since the assets in the trust may be used to benefit the beneficiary, but are outside the reach of the beneficiary’s creditors.

2. Incapacity and Probate Avoidance Benefits.

If a donee receives gifted or bequeathed assets in a trust, those assets are protected by the trust against mistakes or "improper influences" on the donee. Those influences can be the result of immaturity, inexperience, incapacity or possible substance abuse issues. Additionally, use of the trust eliminates the need to probate the donee’s estate at death. The trust simply continues to administer its assets for successor beneficiaries.

3. Benefits from Segregation of Assets.

Inherited wealth received outside of a trust often loses its identity if it is commingled with jointly owned assets (i.e. with assets owned with the beneficiary’s spouse). When wealth is received and retained in a trust, it is more likely that those assets will remain in trust, continuing to increase in size and value for the benefit of future generations.

An irrevocable, dynastic trust should be examined as an integral part of any estate plan for wealthy individuals.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.