An irrevocable trust is a trust that cannot be modified or terminated without the consent of the beneficiary (the person for whom the trust was created and who receives the benefits of the trust). It differs from a revocable trust, the terms of which can be changed by the grantor (the person who creates the trust) at any time. It is an effective tool for estate planning and creditor protection because it transfers ownership of trust property out of the hands of the grantor. In order to take advantage of these benefits, generally the grantor is not the trustee (the person who oversees the property in the trust).
A grantor may be able to retain the income flow of the assets for a specified length of time, so the gift into an irrevocable trust is different than just an outright gift. For example, a mother might put her residence in an irrevocable trust for her children but specify that she will continue living in the house during her lifetime.
An irrevocable trust is a valuable estate planning tool as it allows you to place property, including proceeds of insurance policies, into a trust. The assets are not included in the taxable estate of the grantor, so appreciation of those assets is then exempt from estate tax, and probate is also avoided on those assets.
Depending on the value of the assets, there may be a requirement to file a gift tax return and use part of the grantor’s lifetime exemption (under current law, up to $5 million can be exempt from estate tax) when contributing assets to the trust. An irrevocable trust is a tool to set up generation-skipping trusts, which allows a grantor’s children to receive income from and use trust assets without having the assets included in the child’s taxable estate.
In addition to estate planning, irrevocable trusts can be used for the following reasons.
Irrevocable trusts require careful planning when drafting, as it is a permanent transfer of assets. The tax benefits and consequences can be quite complex, and grantors should seek the advice of professionals, both legal and tax, before drafting and funding any trust.
For more information on the use of irrevocable trusts, contact your WK advisor at (573) 442-6171 or (573) 635-6196.
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