This article provides an overview of the use of irrevocable trusts in estate planning in the United States. An irrevocable trust is made by a grantor or settlor who creates a trust and then transfers money, property or other assets to the trust for the benefit of another, known as the beneficiary. The settlor or grantor of a trust is also sometimes referred to as a trustor. Unlike a revocable trust, in which the grantor or settlor can change their mind and take back property previously transferred to the trust, an irrevocable trust cannot be revoked or changed by the settlor or grantor. A type of revocable trust commonly used in estate planning is a revocable
When individuals and families with substantial assets or income meet with an estate planning lawyer, an irrevocable trust may be one option that is discussed if there is a concern about estate taxes. Another estate planning tool that may be used is funding the irrevocable trust with life insurance.Irrevocable trusts are often made while the grantor is alive. Such trusts are called inter vivos trusts. An irrevocable trust may also be established at death pursuant to a will. A trust established by a last will and testament is called a
Types of Irrevocable Trusts
The following is a list of the types of irrevocable trusts commonly used in estate planning:1. Qualified Personal Residence Trust or QPRT
2. Charitable Lead Trust or CLT
3. Charitable Remainder Trust or CRT
4. Irrevocable Life Insurance Trust or ILIT
5. Grantor Retained Annuity Trust or GRAT
6. Irrevocable Funeral Trust 7. Special Needs Trust or Supplemental Needs Trust or SNT
8. Asset Protection Trust
9. Irrevocable Gift Trust or IGT
This is not an exhaustive list of the types of irrevocable trusts. If you are interested in learning more about how a trust may help you accomplish your specific estate planning objectives, consult an attorney licensed in your state. For a detailed overview of specific types of trusts, see more about trusts.
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Reasons for Making an Irrevocable Trust
The reasons for making an irrevocable trust vary, depending on the specific goals of the trustor. Reasons to make an irrevocable trust include:1. To reduce estate taxes or gift taxes.2. To protect assets against creditors claims. See debts trust beneficiary.3. To reduce income taxes or capital gains taxes on the grantor or settlor.4. To maintain control over how trust assets or income will be used upon the death of the grantor or settlor.5. To set aside assets to pay funeral and burial expenses.6. To provide income or supplemental financial support for a trust beneficiary, such as a spouse, partner, child or grandchild.
7. To remove specific property or other assets from the estate of the grantor or settlor. When this is an objective for making an irrevocable trust, it is important to understand tax implications if the settlor or grantor dies within a short time after assets are transferred to the trust.
Disadvantages of Irrevocable Trusts
Each type of irrevocable trust has its own set of advantages and disadvantages. For example, the advantages and disadvantages of a charitable trust are different than those of a special needs trust. Some of the common disadvantages of irrevocable trusts are: 1. If your relationship with a trust beneficiary changes and you no longer wish trust assets to be used for their benefit, you generally cannot change the terms of the trust.
2. If you need the trust assets back for any reason, such as a change in financial circumstances, including unforeseen long term care or medical expenses, you cannot get them back. 3. Transfer of property to an irrevocable trust may have tax consequences, such as real estate taxes or gift taxes. The tax liabilities that sometimes result from such transfers may be due and payable immediately. See Gift Tax Return. 4. Irrevocable trusts are complex legal instruments that are often burdensome to implement and maintain. A grantor must carefully consider whether the benefits of an irrevocable trust outweigh the expense, time, and effort involved in making and administering an irrevocable trust. For a general overview of what is involved in having a trust, see Trust Administration.Before you agree to make an irrevocable trust, ask a tax advisor about any federal and state tax returns you will be required to file for the trust and the amount of taxes that may be owed. You may also want to ask your attorney about the legal costs involved in maintaining an irrevocable trust.5. An irrevocable trust may not accommodate unforeseen changes that occur in your life in the future. An irrevocable trust usually reduces the flexibility in your estate plan.Despite some disadvantages, establishing an irrevocable trust may be the best option available to accomplish your estate planning objectives. For example, if you are a high net worth individual, there may be significant advantages to using an irrevocable trust in certain circumstances.
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