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Irrevocable Trust

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How Can I Figure Out if I Need a Trust Instead of a Will?

This is a typical question clients ask during our time helping them. Many people believe that Irrevocable trusts are just for the rich, yet they may provide considerable benefits estate of many sizes.

When minimizing estate taxes, trusts are common.  The two most used are revocable trusts and irrevocable trusts.  Both types have their advantages, but our focus today will be on Irrevocable trusts, it’s advantages and disadvantages, their purpose, and different types.

What Is an Irrevocable Trust?

The term Irrevocable Trust refers to a trust whose conditions cannot be changed, altered, or terminated without the grantor’s beneficiary or beneficiaries’ agreement. After successfully transferring all ownership of assets to the trust, the grantor legally relinquishes all rights to the assets and the trust.

In most cases, after its establishment, you cannot alter an irrevocable trust. Irrevocable trusts, like all trusts can avoid probate. Probate is a legal procedure through which assets are transferred from deceased individuals toward their living beneficiaries.  If the value of your assets exceeds the state’s minimal threshold, a formal, time-consuming, and expensive probate court administration will be necessary if a trust is not in place.

Like other trusts, Irrevocable trusts require three different individuals.

  • The Grantor

The grantor is person who opens the trust and also transfers their assets, and control of those assets to the trust.  The trustee then oversees the management of those assets for the beneficiaries.

  • The Beneficiaries

The beneficiaries are the individuals to whom the assets of the grantor are transferred.  Simply, they are the ones who the irrevocable trust will primarily benefit.

  • The Trustee

The person in charge of the managing of transferring the assets of the grantor.  A trustees job is to carry out the directions stated in the trust to their exact specifications.

Individuals can also hold onto the assets in their trust for months, weeks, even years after their death before transferring to chosen beneficiaries.  Depending on how the trust documentation was written and what the goals of the trust were designed to accomplish.  Irrevocable trusts can reduce estate taxes, get access to government benefits, and preserve assets among many other benefits.  It’s use can be had in many different situations.

A will does not offer the same level of privacy, protection and other benefits as a trust.  If the value of your assets exceeds the state’s minimal threshold, a formal, time-consuming, and expensive probate court administration will be necessary.

Depending on the size of the estate it may also incur a significant estate tax.. For this reason and many others, probate court can be a huge headache for most, which an irrevocable trust can avoid.

Advantages and Disadvantages of Irrevocable Trusts

Choosing to establish irrevocable trusts has its pros and cons. Knowing its advantages and disadvantages can help you decide if it’s the best option for your unique situation.

Advantages of Irrevocable Trusts

Here are some uses that irrevocable trusts can fill:

Protect Assets

Irrevocable trusts are an excellent method to divide ownership while protecting an individual’s assets legally. This keeps them safe against litigation, creditors, and other risks to the clients’ private wealth.

Minimize Estate Taxes

An Irrevocable trust can be used to lower personal income and capital gains taxes as part of a tax planning strategy. This is not always achievable for everyone or in every circumstance but is an important discussion to have with an estate planning attorney.

Control the Distribution of Assets

An Irrevocable trust comes in a variety of forms and sizes. It can enable the grantor to establish a custom solution for allocating their assets to their dependents after death.

Estate Planning

Trusts are widely used in estate planning, and for good reason. They typically provide a seamless transfer of an individual’s assets to their heirs by avoiding time-consuming and costly probate processes. They can also aid in the reduction of estate taxes and gift taxes.

Eligibility to Government Programs

Disabled Medicaid and Supplemental Security Income recipients are subject to strict income and asset limits; if they possess or receive too much money, they may forfeit their benefits from the government. An Irrevocable trust can be used to protect income and assets so that these limits are not exceeded.

Disadvantages of Irrevocable Trusts

Limitations on Revisions

When the grantor forms an irrevocable trust agreement, the appointed trustee takes possession of trust property and is responsible for administering and distributing it following the terms of the arrangement.

Tax Implications

Irrevocable trusts are taxed as independent legal entities with their tax identification number. If the trust generates more than $600 in a tax year, the trustee is required to file and pay federal income taxes at the trust’s rate of taxation.

Types of Irrevocable Trusts

An irrevocable trust has different types; each having unique uses and executions. Knowing the types offers you a better understanding of irrevocable trusts and can help you choose the best option.

1. ILIT (Irrevocable Life Insurance Trust)

Individuals establish this form of trust to own one or even more life insurance policies that the grantor transfers to the trust. The transfer of the policy or policies to the ILIT is irrevocable. The trustee is in charge of the ultimate transfer of the insurance benefits to the beneficiaries following the grantor’s death.

2. QPRT (Qualified Person Residence Trust)

These are often used to minimize the grantor’s chargeable assets and simplify things for the grantor’s heirs to pass on personal residence following their death.

A QPRT is an irrevocable trust used to exclude principal residences from the grantor’s estate. The grantor transfers assets of their residence to the trust on the condition that they maintain the right to live in residence rent-free for a certain period of years or until death.

We are here to help you.  Please contact Heritage Law and start planning for the future today.

We work one on one with you directly to ensure your irrevocable trust is designed and executed properly, from start to finish.

We ensure the future plan we put in place makes the most financial sense for your property and your family long term.

We take our time to explore all available options as we strive for excellence. We work hard so you don't have to.

3. IDGT (Intentionally Defective Grantor Trust)

These are generally used to reduce property taxes by eliminating them from the grantor’s estate while preserving the possible advantages of income taxation on an individual basis. They are estate planning instruments intended to benefit the grantor’s heirs.

4. GRAT (Grantor Retained Annuity Trust)

These serve several essential purposes. They serve as asset protection measures by isolating the grantor’s legal ownership of the assets in the trust. They enable the grantor to pass on a portion of their inheritance to their heirs while maintaining the essential advantages while still living. They are also one of the most tax-effective methods of distributing your estate.

5. CRT (Charitable Remainder Trust)

A CRT is a very successful tax-saving structure that enables the trust’s grantor to divide the trust’s earnings to beneficiaries while donating the balance to a charitable organization. CRTs generally pay income produced from trust assets towards the grantor (if specified beneficiary) or to other beneficiaries for a fixed length of time.

This might be for the rest of their lives or a set period of years. Following the expiration of this term, the assets remaining in the trust are retained by the chosen charity. Because assets contributed to the trust are tax-free, this is an excellent method to make a charitable gift while also reducing taxes.

6. APT (Asset Protection Trust)

An asset protection trust is a form of self-settled spendthrift trust that allows the grantor to become the primary beneficiary of the trust at the same time. As a result, it is an excellent financial instrument for asset protection and anonymity.

Only if there is a direct threat to the trust assets, such as a court lawsuit against the grantor, may the trustee step in and exercise their obligation to safeguard the trust funds. Suppose the court ordered the grantor to withdraw funds held in an APT to satisfy a personal responsibility. In that case, the trustee may refuse to do so because the grantor is operating under duress.

Offshore APTs in jurisdictions like Nevis and the Cook Islands have typically been particularly adept at shielding assets from local court decisions and other dangers. They also provide privacy rights and tax savings.

How to Set Up an Irrevocable Trust

Clients cannot revoke an irrevocable trust in their lifetime. If an individual has decided and prepared to establish an irrevocable trust, it’s best to learn how to set up one.

1. Acquire a Model Trust Form

Acquiring a Model Trust Form can help in creating an Irrevocable Trust Agreement.

2. Draft an Irrevocable Trust Agreement

Once a Model Trust Form is obtained, draft the Trust Agreement according to the choices made.

3. Fulfill the Trust Agreement

When the individual is satisfied with the agreements, taking action towards the agreement must be done.

4. The Trustee Must Acquire Tax ID for the Trust

Have the trustee acquire a tax id for the trust for tax purposes.

5. Funding the Trust

Place the assets to the trust after fulfilling the trust agreement.

6. Have the Trust Registered in Accordance to the State Law

Registering the trust according to state law. Not all states require this.

7. If the Trust Receives Income, Have the Trustee Complete Form 1041 From the IRS

If the trust receives over 600$ of taxable income, the trustee must complete the form.

We are here to help you.  Please contact Heritage Law and start planning for the future today.

Start an Irrevocable Trust With an Attorney Who Cares

Estate taxes, federal estate tax, the grantor’s taxable estate, trust funds, and many other topics are all important considerations best made with a professional by your side. 

Due to the nature of and irrevocable trust,  it is best to work with an attorney who has experience in this field.

John Diamantis has the experience in all aspects of estate, trust, and tax planning. As an experienced lawyer who also has a unique background in finance, he has the ability to provide families with quality legal guidance that helps them incorporate their personal values into their estate plan.

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