Irrevocable Trust Tax Advantages

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What is an Irrevocable Trust?

In contrast to a revocable trust, which can be modified by the grantor, an irrevocable trust cannot be modified or terminated unless the beneficiary of the trust gives permission.

Irrevocable trusts often serve the purpose of protecting assets from long-term care expenses. For example, once an individual places funds in an irrevocable trust, a nursing home will not be able to collect those funds.

In addition to protecting assets from long-term care expenses, irrevocable trusts are also advantageous in that they offer several significant tax advantages.

Tax Advantage of an Irrevocable Trust

When assets are placed in an irrevocable trust, they are essentially removed from the value of an individual’s estate. In most practical respects, the person creating the trust no longer owns the assets placed in the trust. As a result, the assets will not be subject to estate taxes upon the death of the individual.

This death tax exception does not apply to revocable trusts since the property is still under the direct ownership of the person who created the trust.

Although irrevocable trusts avoid taxes at the death of the person who created the trust, they are still subject to other taxes, such as annual income tax if the trust has earned any income. However, income-producing property often pays lower income taxes than if the same property had not been placed in trust.

Consulting an Attorney

Issues concerning taxes on trusts can quickly become highly complex. In order to avoid unnecessary complications, you should consult an experienced estate lawyer in order to successfully create and manage an irrevocable trust.

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Last Modified: 09-02-2013 03:53 PM PDT

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