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Irrevocable Trusts

An irrevocable trust is simply a type of trust that cannot be changed after the agreement has been signed, or a revocable trust that by its design becomes irrevocable after the Trustmaker (also called a Grantor) dies.

With the typical Revocable Living Trust, it will become irrevocable when the Trustmaker dies and can be designed to break into separate irrevocable trusts for the benefit of a surviving spouse, such as with the use of AB Trusts or ABC Trusts, or into multiple irrevocable lifetime trusts for the benefit of children or other beneficiaries.

Irrevocable trusts can accomplish a variety of estate planning goals:

  • Estate Tax Reduction.

Irrevocable trusts, such as Irrevocable Life Insurance Trusts, are commonly used to remove the value of property from a person's estate so that the property cannot be taxed when the person dies. In other words, the person who transfers assets into an irrevocable trust is giving over those assets to the trustee and beneficiaries of the trust so that the person no longer owns the assets. Thus, if the person no longer owns the assets, then they cannot be taxed when the person later dies.

    • AB Trusts that are created for the benefit of a surviving spouse are irrevocable and, thus, can make full use of the deceased spouse's exemption from estate taxes through the funding of the B Trust with property valued at or below the estate tax exemption. Then, if the value of the deceased spouse's estate exceeds the estate tax exemption, the A Trust will be funded for the benefit of the surviving spouse and payment of estate taxes will be deferred until after the surviving spouse dies.
    • The trust remains revocable while both spouses are alive. The couple may withdraw assets or cancel the trust completely before one spouse dies. When the first spouse dies, the trust becomes irrevocable and splits into two parts: the A trust and the B trust. The A trust (often called the “Survivor's Trust in Arizona) contains the surviving spouse's half of the estate. The surviving spouse controls all the property in the A trust and may receive distributions of income and principle as needed. The B trust contains the deceased spouse's half of the estate. The B trust belongs to the beneficiaries named in the trust—typically the couple's children. The surviving spouse has the right, however, to use the property contained in the B trust during life and to receive any income it generates. In certain situations, the surviving spouse may access the principle of the B trust. When the surviving spouse dies, the property in the B trust passes to the beneficiaries designated in the original trust document. The assets contained in the A trust are distributed to beneficiaries named by the surviving spouse.
  • Asset Protection.

Another common use for an irrevocable trust is to provide asset protection for the Trustmaker and the Trustmaker's family. This works in the same way that an irrevocable trust can be used to reduce estate taxes – by placing assets into an irrevocable trust, the Trustmaker is giving up complete control over, and access to, the trust assets and, therefore, the trust assets cannot be reached by a creditor of the Trustmaker or an available resource for Medicaid planning. However, the Trustmaker's family can be the beneficiaries of the irrevocable trust, thereby still providing the family with financial support, but outside of the reach of creditors. There are also irrevocable trusts called Self-Settled Trusts or Domestic Asset Protection Trusts that in some states, including Alaska, Delaware, Nevada, and Tennessee, offer creditor protection and allow the Trustmaker to be a trust beneficiary.

In addition, as mentioned above, the various irrevocable trusts that can be created for the benefit of the Trustmaker's surviving spouse or other beneficiaries after the Trustmaker of a Revocable Living Trust dies can be designed to offer asset protection for the trust beneficiaries.

  • Charitable Estate Planning

Another common use of an irrevocable trust is to accomplish charitable estate planning, such as through a Charitable Remainder Trust or a Charitable Lead Trust. If the Trustmaker makes the initial transfer of assets into a charitable trust while still alive, then the Trustmaker will receive a charitable income tax deduction in the year of the transfer is made. Or, if the initial transfer of assets into a charitable trust doesn't occur until after the Trustmaker's death, then the Trustmaker's estate will receive a charitable estate tax deduction.

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