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What is an Irrevocable Trust?

Posted on 08 Jun 2011 by admin | Filled under: uncategorized

An irrevocable trust is one that's created so that, once it is signed, it's permanent - it can't be changed or done away with.

Why Use an Irrevocable Trust?

The fact that an irrevocable trust can't be changed or revoked once it's created makes it inflexible. There are also revocable trusts available – those that can be changed or cancelled at any time during the trust maker's lifetime. So, why would someone opt for an irrevocable trust?

Once you transfer property into an irrevocable trust, you no longer own or control the property. This fact means that a variety of asset protection and tax savings options become available to you. With a revocable trust, on the other hand, your property remains under your control, so it's not shielded from creditors or from estate taxes.

Examples of Irrevocable Trusts

Here are a few examples of irrevocable trusts:

Irrevocable Life Insurance Trust: This is a type of trust that is used to reduce your estate tax bill. Once the trust is established, ownership of your life insurance policy is transferred to the trustee. The trust is named beneficiary of your policy. Your spouse and children (or other loved ones) are in turn named beneficiaries of the trust itself. Since you no longer have ownership or control of the policy, it's removed from your taxable estate, and your overall estate tax bill is reduced.

Qualified Personal Residence Trust: This is a type of trust that, when properly established, can reduce both your estate tax bill and the amount of gift taxes you pay. You establish the trust, usually naming your children as beneficiaries, and transfer your residence to the trustee. Part of establishing the trust involves designating a period of time during which you'll continue to reside in the home, after which the trustee will transfer the home to your beneficiaries. Since your beneficiaries have to wait to receive your home, the value of this gift to them is reduced, also reducing the amount of the gift taxes you'll pay. Plus, assuming you're still alive when the house is transferred to your beneficiaries, it is no longer part of your taxable estate. So, your estate tax bill is minimized.

Charitable Remainder Trust: With a Charitable Remainder Trust, you establish an irrevocable trust, transfer assets to the trustee and name one or more beneficiaries who will receive payments from the trust for a certain period of time. Once this period of time is over, the trust assets are transferred to a charity chosen by you. A Charitable Remainder Trust allows you to reduce the amount of estate tax you'll pay, and it provides for income tax savings.

These are just a few examples of irrevocable trusts and the benefits they can provide. An estate planning attorney can give you more information about how an irrevocable trust might fit into your overall estate plan.