How Setting Up Irrevocable Trusts Can Help Your Estate
Read our article to learn more about irrevocable trusts and how they could help you and your estate.
Did you know that less than two percent of Americans have money or assets held in a trust?
There are all sorts of reasons why you might want to set up a trust, but for the majority of people, those trusts are ones that they can change if they so wish.
There may be some situations, however, when it's better to set up an irrevocable trust instead.
As the name suggests, an irrevocable trust is a trust that in most circumstances can't be revoked.
There are three roles in any trust. First, there is the creator of the trust, who is the person who puts the money or assets into a trust in the first place.
Then there is the trustee, who is in charge of acting out the trust's instructions, making investments on behalf of the trust, paying the expenses for the trust, and so on.
Finally, there is the beneficiary, who is the person that enjoys the benefits of the income of the trust or receives its assets.
One person can take on all three roles, which means that the person who sets up the trust can make changes to it as often as they want. These are revocable trusts. An irrevocable trust is one where the trustee is not the same as the beneficiary.
Since the trustee is the only one who can make changes to the trust, neither the creator nor the beneficiary has any control over it at all.
Why would you want to set up a trust that you don't control? Well, since the creator no longer has control over the assets in the trust, they are not considered to be their property for estate planning purposes.
This offers a number of benefits.
Protect Government Benefits
If the beneficiary is in receipt of government benefits such as Social Security disability payments or Medicaid, then there are strict guidelines on the levels of earnings that cannot be crossed in order to continue to receive these benefits.
An irrevocable trust can help to remain within these guidelines by sheltering assets and income so that the threshold is not breached. Since the beneficiary of the trust also has no control over it, the money and assets held in the trust are not considered among their assets.
Protect Your Assets
If you work in a profession where your assets are potentially at risk from lawsuits, or from creditors, then holding assets in an irrevocable trust can protect them should the worst happen.
If you're a surgeon, for example, then there is a risk that you may be subject to lawsuits. By using an irrevocable trust, you can protect some of your assets, which would be beyond the reach of any settlement payments.
It can also help to protect assets from creditors, although the amount that you can protect varies from state to state, so be sure to do your homework or seek the advice of the best estate planning lawyer.
Avoid Generation-Skipping Transfer Tax
Generation-skipping transfer tax, or GSTT, is a tax that results from the transfer of assets by inheritance or gift to a person who is more than 37.5 years younger than the donor of the assets. This does not apply if the recipient is a spouse.
The tax was introduced in 1976, prior to which it was possible to gift money and property to grandchildren without incurring any federal estate taxes. The GSTT is a flat 40%. The good news, however, is that there is a generous threshold; this tax will only kick in if the gift is above $12.06 million, as of 2022.
For wealthy individuals, however, it is still possible to avoid paying generation-skipping transfer tax, by making use of an irrevocable trust. At Citadel Law Firm we usually recommend clients with assets over $5million to consider creating an irrevocable trust.
Avoid Gift Tax
Gift tax is a tax on the transfer of money or assets from one person to another without receiving anything, or at least not the full value, in return.
Money transferred into an irrevocable trust that would not pass to the beneficiary until the creator's death, for example, would be subject to gift tax on the whole amount.
There is, however, a way around this. By using a Crummey letter stating that the beneficiary has the right to withdraw a share of the contributions for a 30-day period, this makes the gift a present interest rather than a future interest and so removes the gift tax burden.
Are You Looking for Help With Your Estate Planning?
If you're thinking about setting up an irrevocable trust, then you're going to need a good estate planning attorney. That's where we can help.
We're an Arizona law firm that covers a wide range of legal areas, including estate planning, living trusts, probate, living wills, power of attorney, elder law, Medicaid planning, and more.
We have offices all over the Phoenix East Valley, and service Queen Creek, Chandler, and Gilbert, as well as Phoenix, Scottsdale, Mesa, and San Tan Valley. We also can offer remote services across the whole of Arizona.
Schedule a free evaluation today. Call (480)565-8020 or click here to schedule it.