What is an Irrevocable Trust?
An irrevocable trust is one that’s created so that, once it is signed, it’s permanent
- it can’t be changed or done away with.
Why Use an Irrevocable Trust?
The fact that an irrevocable trust can’t be changed or revoked once it’s created
makes it inflexible. There are also revocable trusts available – those that can be
changed or cancelled at any time during the trust maker’s lifetime. So, why would
someone opt for an irrevocable trust?
Once you transfer property into an irrevocable trust, you no longer own or control
the property. This fact means that a variety of asset protection and tax savings
options become available to you. With a revocable trust, on the other hand, your
property remains under your control, so it’s not shielded from creditors or from
Examples of Irrevocable Trusts
Here are a few examples of irrevocable trusts:
Irrevocable Life Insurance Trust: This is a type of trust that is used to reduce
your estate tax bill. Once the trust is established, ownership of your life
insurance policy is transferred to the trustee. The trust is named
beneficiary of your policy. Your spouse and children (or other loved ones)
are in turn named beneficiaries of the trust itself. Since you no longer have
ownership or control of the policy, it’s removed from your taxable estate,
and your overall estate tax bill is reduced.
Qualified Personal Residence Trust: This is a type of trust that, when
properly established, can reduce both your estate tax bill and the amount
of gift taxes you pay. You establish the trust, usually naming your children
as beneficiaries, and transfer your residence to the trustee. Part of
establishing the trust involves designating a period of time during which
you’ll continue to reside in the home, after which the trustee will transfer
the home to your beneficiaries. Since your beneficiaries have to wait to
receive your home, the value of this gift to them is reduced, also reducing
the amount of the gift taxes you’ll pay. Plus, assuming you’re still alive
when the house is transferred to your beneficiaries, it is no longer part of
your taxable estate. So, your estate tax bill is minimized.
Charitable Remainder Trust: With a Charitable Remainder Trust, you
establish an irrevocable trust, transfer assets to the trustee and name one
or more beneficiaries who will receive payments from the trust for a certain
period of time. Once this period of time is over, the trust assets are
transferred to a charity chosen by you. A Charitable Remainder Trust
allows you to reduce the amount of estate tax you’ll pay, and it provides for
income tax savings.
These are just a few examples of irrevocable trusts and the benefits they can
provide. An estate planning attorney can give you more information about
how an irrevocable trust might fit into your overall estate plan.
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