The reason an irrevocable trust was created is to transfer the assets from the grantors to the palm of the beneficiary’s hand. It will also help shrink the value of the estate of the grantor and valuables protect from creditors. Irrevocable trusts cannot be amended, modified or terminated unless with permission of grantor’s beneficiary or by order of court. The rules can vary from one-by-one state. Thus, the grantor makes a legal transfer of the rights of ownership to the assets and the trust, with the result that he or she legally transferred all ownership of the assets into the trust. Irrevocable trusts are usually established to minimize estate taxes, obtain government benefits and protect assets. It is opposite to a revocable trust, where the grantor is permitted to alter the trust but lose the benefit of such things as creditor protection.
How an Irrevocable Trust Works
In the overwhelming majority of occasions, irrevocable trusts are established for estate and tax reasons. The reason is that it takes all incidents of ownership away, taking the assets out of the taxable estate of the grantor. In addition, it frees the grantor from the tax liability depending on which assets generate income1 from the transfer. Nevertheless, if the grantor is the trustee, they cannot benefit from the tax rules. These assets that belong in the trust include a business or other business investments, cash, and life insurance policies. Estate and legacy planning still has an important place for trusts. However, the rub comes in the cost. It’s complicated enough to set up any sort of trust that an attorney is needed. Thus, people may end up spending between a few thousand or even more than a few thousand dollars or more on attorney fees just to put them in place.
Especially for those who work in professions that make them prone to lawsuits, irrevocable trusts come especially in handy. Once an asset is transferred to such a trust it becomes the ownership of the trust for the benefit of its beneficiaries. Also, since the trust is not a party to any lawsuit, it is therefore safe from creditors and legal judgments presented against it. Today’s irrevocable trusts have some provisions that were not normally found in earlier forms of this instrument. In addition, these additions provide a better flexibility in terms of the trust management and the assets distribution. There are provisions such as decanting, which enables the movement of the trust into a newer trust which will have more advantageous or modern provisions, to ensure proper administration of the trust assets. Other features which allow the trust to change its state of domicile can provide further tax benefits or other advantages.
Bottom Line
The two types are living trusts created by an individual and funded by them during their lifetime and testamentary trusts created after the death of the one creating the trust according to the terms in their will. Irrevocable trusts are more involved and have tax consequences both now and, in the future, so consult a tax or estate attorney if you are considering setting one up.
