If you’ve ever heard of an irrevocable trust, you might be thinking that they sound like the best option for a wealthy individual to use in order to avoid paying taxes on their family wealth. But, there are actually some very serious disadvantages that come along with an irrevocable trust.
So, you better think twice before you decide whether to go for an irrevocable trust or not. Maybe a San Antonio trusts planning attorney can help you decide how to avoid the possible pitfalls of an irrevocable trust.
Anyways, we will now see more into the disadvantages of irrevocable trusts.
1. Loss of control
In order for a person to avoid paying taxes on their investments, they must have full control over those investments. The only way for such individuals to avoid the taxation of their money would be if they have full control over those investments. With an irrevocable trust, this is easily accomplished because the owner of the trust can’t touch or make changes to what’s in it when he or she wants to. This means that in the case of an irrevocable trust, the owner is not able to control his or her finances and that can definitely lead to problems.
2. Fairly rigid terms
The other issue with irrevocable trusts is that the terms are fairly rigid. What this means is that if the terms are not structured in a very clear manner, then it can lead to all kinds of problems.
3. The three-year rule
Another disadvantage that comes with irrevocable trusts is the so-called three-year rule. Under this rule, any assets that you put into an irrevocable trust will be taxed immediately if they were placed there in order to avoid paying taxes in the future. In other words, if you put money into your trust in order to hide them from the government and then withdraw those funds after three years, those funds will get taxed right away even though they are completely legitimate investments.
4. The five-year rule
Another disadvantage of irrevocable trusts is the five-year rule. This states that if you put your money into an irrevocable trust, then you have to claim it within 5 years, or else it will be taxed. This is true even if you put it in there because you want to avoid paying taxes altogether.