Irrevocable Trusts

Irrevocable trusts are used for a variety of reasons, but most commonly the purpose is to remove property from a grantor's estate for federal estate tax purposes. Income from the trust property will not be includable in the grantor's taxable income and all future appreciation on the property will be out of the grantor's taxable estate. The transferred property is also protected from creditor's claims.

There may be immediate adverse consequences with regard to property rights and taxes. For example, the transfer of property may result in an immediate gift for gift tax purposes (on amounts exceeding the annual exclusion exemption) and an immediate generation-skipping transfer for generation skipping tax purposes. If real property is involved, there could be a state property tax ramification.

The grantor also must give up most rights to control the property. The grantor is required to part with the economic benefit and absolute control of the trust property to escape estate and income taxes. It is simple to create an irrevocable trust but almost impossible to have it terminated.

Making the most of the unified credit, a taxpayer may gift substantial amounts during his or her lifetime and avoid taxation on the gifts. However, using the unified credit against your gift tax liability will reduce or possibly eliminate the credit available for use against the federal estate tax at death.

Despite possible gift tax liability, because of the nature of the estate and gift tax inclusive/exclusive calculation (see Federal Transfer Tax), removing property from an estate to an irrevocable trust may still result in a more tax efficient way to transfer your accumulated wealth to your beneficiaries.

Some types of Irrevocable Trusts include Life Insurance Trusts that will effectively remove the value of a policy from the grantor's estate and Grantor Retained Interest Trusts where the grantor retains an interest in the trust assets for a limited period of time and then the remainder interest passes to another person. Examples of Grantor Retained Interest Trusts are Qualified Personal Residence Trusts and GRATs, GRUTs & GRITs. For the philanthropic minded there are Charitable Trusts (CLTs, CRATs & CRUTs) that provide benefits to named individuals for a specified period of time, with the remainder interest then passing to charity. And a trust created to preserve means tested government benefits for disable or aged beneficiaries is called Special Needs Trusts.

This is not a complete list of irrevocable trusts involved in estate planning. Speak to a qualified attorney to address issues that are particular to your situation.

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