Irrevocable Living Trust

You don't need deep pockets to benefit from a living trust. You must simply have a desire to provide for loved ones or causes you care about. You may want to guarantee income for a family member with special needs. Or you may want to pay for your grandchildren's college education. There are countless reasons to create a living trust and dozens of types of trusts.

Generally, when people talk about living trusts, they refer to revocable living trusts. A revocable trust is a trust document where the person creating the trust retains control of the trust property. The person creating the trust (the grantor or settlor) frequently serves as the trustee.

With revocable trusts, the grantor can change the terms of the trust and move trust assets any time before the grantor's death. In contrast, irrevocable living trusts can't be terminated. The grantor gives up complete control over the trust property. The grantor creates the trust during their lifetime but cannot change or amend it.

So, why would you want to give up complete control of your property to an irrevocable living trust? For various reasons, irrevocable living trusts can be a good option, including for tax purposes.

Irrevocable living trusts have tax advantages that revocable trusts don't provide. Irrevocable trusts also shield assets from creditors. They can help provide for family members who would benefit from trust funds. These family members may not be able to be trusted with receiving a single large gift.

Understanding Irrevocable Living Trusts

Creating an irrevocable trust is a serious decision. You'll give up control over the trust property with an irrevocable living trust, but you determine the uses of the trust assets. You also select who serves as the trustee and the successor trustee.

The trustee takes legal ownership of the trust assets. The trustee also assumes fiduciary responsibility for managing those assets and carrying out the purposes of the trust. The trustee owes fiduciary duties to the trust beneficiaries. You determine the eligibility for trust beneficiaries. This includes choosing the identity of the beneficiaries. You can even retain the right to change them.

The key features of irrevocable trusts are reflected below:

  • No modifications: The trust can't be changed or modified once you create it.
  • Personal tax benefits: You can transfer appreciated assets, such as stock and real estate, into the trust. When this occurs, the grantor will save on capital gains taxes. The trust is its own entity with its own tax ID number. It shifts income tax away from you and to the trust. The trust has its own tax return. An irrevocable trust doesn't avoid taxes entirely, though.
  • Property ownership: Once you place property into an irrevocable trust, it no longer belongs to you. This can simplify the probate process for your loved ones. Owning fewer probate assets can reduce the time and expense involved in the probate process.
  • Asset protection: Property in a trust is generally shielded from outside creditors, liens, and divorcing spouses.
  • Long-term care: Moving assets to an irrevocable trust allows the grantor to obtain Medicaid benefits if they go into a nursing home. By placing assets into an irrevocable trust at least five years ahead of the actual need, the grantor has secured their assets to the benefit of named beneficiaries.
  • Trustees: Unlike a revocable trust, the grantor cannot serve as the trustee of an irrevocable trust.
  • Estate tax savings: The grantor no longer owns the property. It's not included in tax calculations of the total value of the estate's assets at the time of death. Thus, it reduces the value of your taxable estate. This could be the difference between getting a hefty tax bill from the IRS (if the estate exceeds the federal estate tax exemption) and avoiding estate taxes altogether.

A testamentary trust is set up after a grantor's death by including the trust in their last will and testament. On the other hand, a grantor creates an irrevocable living trust during their lifetime.

Types of Irrevocable Living Trusts

There are many reasons to create an irrevocable living trust. This ranges from the long-term care of a disabled beneficiary to shielding a home from estate taxes. A few of the more common irrevocable trusts are described below.

Bypass Trust

A bypass trust is also known as a family trust or an AB trust. It helps a family save on estate taxes. You can also use a bypass trust to provide income to your spouse or other family members during the surviving spouse's lifetime.

You and your spouse will each have provisions in your wills directing personal assets, not community property, to be used to fund the trust. An example of an asset used to fund these trusts includes assets already in a revocable living trust. Another example is the proceeds of a life insurance policy or retirement account that names the bypass trust as beneficiary.

Irrevocable Life Insurance Trust

An irrevocable life insurance trust owns a life insurance policy during the insured's life. The trust distributes the life insurance proceeds after the grantor's death. This is one of the most frequently used estate planning tools because of the tax savings benefit. The tax rules are complicated. By excluding the life insurance assets from the insured's estate, this trust can more than double the policy proceeds payable to heirs.

Special Needs Trust

Typically, people with disabilities qualify for government assistance. Such programs include Supplemental Security Income (SSI), Medicaid, vocational rehabilitation, and subsidized housing. If these beneficiaries received an outright gift, it could jeopardize their government benefits. Income from a special needs trust can pay for housing, assisted living arrangements, education, training, vacations, professional services, and hobbies.

Qualified Person Residence Trust

Also known as a QPRT, the grantor transfers the title of their home to the trustee of the trust. However, the grantor keeps the right to live in the home rent-free for a number of years called for by the trust. The grantor pays all the ordinary expenses. At the end of the term, if the grantor is still living, the residence passes to the beneficiaries, usually the grantor's children.

Spendthrift Trust

This estate planning tool seeks to protect a beneficiary from wasteful spending. Such spending may otherwise rapidly exhaust the trust assets. The assets are generally creditor judgments or any attempts to attach or lien against the beneficiary's trust interest.

Charitable Remainder Trust

With a charitable remainder trust, a grantor can transfer assets to their beneficiary and then disperse the remaining trust assets to a charity. The grantor may be able to take a partial income tax deduction for funding the trust.

A charitable remainder trust provides distributions to at least one non-charitable income recipient for a set number of years. The remainder goes to at least one charitable beneficiary. It allows you to donate generously while receiving tax benefits.

Free Review of Your Estate Planning Case

Trusts are popular estate planning tools. An irrevocable trust might be suitable for your estate plan, but there are no do-overs with an irrevocable trust. It's critical to consult with an estate planning attorney for legal advice before setting up your trust. Working with an experienced attorney, you can receive a free case review.

Take the first step in making an informed decision about the best estate planning option for your family. You can also get started on estate planning with our state-specific forms.

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