One of the most important estate planning
tools ever devised is the Irrevocable Trust. Here
are some facts and comments about these trusts from
the just-updated book, The New Book of Trusts
(610 924 0515):
Q. What is an irrevocable trust?
A. Think of a trust as a box into which
you can put all types of assets. A revocable trust
is like a "box with a string on it." By "pulling
on the string", you can recover the property you placed
into the box or change the terms of the agreement
you made when you set up the box.
If you "set you the box without a string"
of if you "cut the string" you kept when you set up
the box, your trust becomes irrevocable. You can't
revoke it. You can no longer reach in and get back
cash or other assets you put into the trust. Nor
can you unilaterally change the terms of the trust.
The term "irrevocable trust" is usually
used to describe a "living" or "inter vivos" trust
created during the lifetime of the grantor
(that's you, the person who creates and funds the
trust) that cannot be revoked, altered, amended, or
terminated by the grantor. The grantor transfers
legal title to property (called corpus or principal)
to the trustee (the person or parties) who
hold(s) legal title to the property placed into the
trust. The trustee is responsible for administering
that property for the benefit of the trust's beneficiary(ies)
(the person(s) or party(ies) for whose benefit the
trust was created).
Which strings you keep - and how many
- will have a direct impact on whether or not you
will be taxed on the trust's income and whether or
not trust assets will be included in your estate for
federal and state death tax purposes. (If tax savings
are not a major consideration, you may want to consider
holding on to one or more of these powers).
Q. Why would I consider creating
a trust that I couldn't revoke or amend?
A.No one would give up the right to
recover cash and other property or change the terms
of a trust - unless the stakes were very high. Keep
reading and you'll find - they are!
Of course, not everyone needs to set
up an irrevocable trust. No estate planning tool
should be used just because it is popular - or even
because it may save huge amounts of estate taxes.
Don't use an irrevocable trust unless it will accomplish
a number of objectives that are very important to
The decision to use an irrevocable trust
is really two separate decisions. The first decision
is whether or not to make a lifetime gift. The second
decision is whether to make the gift outright or in
Many (perhaps most) gifts - either outright
or in trust - are made from generosity or love. But
if you are looking for a less altruistic reason for
making gifts, especially those to irrevocable trusts,
the answers are usually, "to control the timing and
conditions under which my beneficiaries will use and
enjoy the gift" and "to save taxes."
Lifetime gifts can save death taxes
(and income taxes) in a number of different ways:
First, the federal gift tax annual exclusion
allows you to give $11,000 (increased from time to
time for inflation) each year to as many different
people as you like (or $22,000 if you are married
and your spouse agrees to "split" the gifts for gift
tax purposes). Once you give it away, it can't be
taxed. When your estate exceeds the "unified credit
exclusion equivalent" ($1,000,000 in 2002 and scheduled
to increase to $3,500,000 by 2009), the excess is
subject to tax rates beginning at 37% and climbing
to 50%. For someone with an estate potentially subject
to federal estate tax, each $11,000 gift currently
may save about $4,000 in estate tax.
Another reason to make lifetime gifts
is that shifting income-producing assets from high
income taxpayers' brackets to low-income taxpayers
can result in the income being taxed at much lower
rates, reducing the total income tax burden of the
Life insurance can be transferred during
lifetime to a trust with very little "cost" in terms
of taxes or loss of financial security, and yet save
tremendous amounts in federal estate tax and state
death taxes. If life insurance is purchased and owned
by an irrevocable trust, the proceeds can be applied
for the benefit of your family or other beneficiary
after your death, free of any federal or state death
There are also many non-tax reasons
for making gifts in trust. One of these is to protect
your assets from the claims of your creditors. Suppose
your profession makes you a potential subject of a
lawsuit for professional errors, or your business
operations expose you to financial risks in the event
of unexpected market or business changes. You may
want to transfer some of the assets you have accumulated
to your spouse or children to make sure that they
will be able to enjoy them and benefit from them even
if you might not. By placing an asset and its income
in an irrevocable trust beyond your reach, assuming
there is no fraud, you are also placing that asset
beyond the reach of your creditors.
Please feel free to
call to discuss more about trusts and how they may
play a role in your family's financial security.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.