A living trust is a trust that goes into effect while the person who created the trust, or “grantor,” is still alive. The grantor places property in the trust and assigns a person known as a trustee to manage it. Unlike a revocable living trust, the grantor cannot also be the trustee.
The property will pass to the beneficiaries when a specific event occurs, like the death of the grantor. Irrevocable living trusts are often used as substitutes for wills to avoid probate or paying estate taxes.
An irrevocable living trust is one that cannot be changed or terminated after it has been signed by the grantor. Therefore, the elements that define an irrevocable living trust are:
- The grantor is living when the trust is finalized and goes into effect, and
- The trust cannot be revoked
Irrevocable living trusts can be used to avoid or reduce taxes. Specific types of irrevocable living trusts that avoid or reduce taxes include:
- Bypass Trusts: These are trusts used by spouses to reduce estate taxes when the other spouse dies. When the first spouse dies, most of their property is in the trust. The spouse who is still living can use the property in the trust, along with any income it provides, but they never own that property. When the other spouse dies none of that property is included in their estate.
- Qualified Terminable Interest Property (QTIP) Trusts: The trustor gives a life estate in property to their spouse without the transfer being subject to a gift tax. That means the spouse has the right to use the property during their lifetime. The spouse receives income from the property, but not an ownership interest. When the spouse dies, the property in the trust passes to the beneficiaries that the grantor specified when they created the trust.
- Qualified Domestic Trusts (QDOT): Like a QTIP trust, but used when the spouse is not a U.S. citizen.
- Charitable Trusts: A charitable trust is a trust set up for charitable purposes. They reduce income and estate taxes via gifts to charitable organizations.
- Generation Skipping Trusts: Trust assets are passed to the grantor’s grandchildren instead of their children. In this situation the trustor’s children avoid the estate taxes they would have paid had the property been passed to them.
- Life Insurance Trusts: Life insurance is put into a trust and is not included as part of an estate for tax purposes. Once the trust is made the grantor cannot have any control over the policy. The trust must be in place for three years before the grantor’s death for the trust to avoid estate taxes.
- Grantor-Retained Interest Trusts: With a grantor-retained interest trust, assets are removed from the estate by being put into trust. The grantor keeps some interest in the trust for a period of time. When that period of time has passed the beneficiaries own the property. The value of the gift is assessed at the time the trust was created. The grantor must live beyond the termination of the trust.
What are some Important Considerations when Creating an Irrevocable Living Trust?
It is very important when creating a trust that you choose a trustworthy and knowledgeable trustee. It is also important to carefully consider the beneficiaries of the trust and include back-up beneficiaries. The trust should include instructions for what happens if any beneficiaries die before the trust property is transferred. Otherwise any assets that would have passed to those beneficiaries go back to the grantor and that property will be distributed based on the will.
The terms of the trust should also include instructions for what happens to the trust property after the beneficiaries die.
It is also a good idea to have a pour-over will that outlines what happens to any property not included in the irrevocable living trust. When the testator dies any assets not already in the trust will automatically pass into or “pour over into” the trust.
Even though an irrevocable living trust can be used to avoid probate and reduce or eliminate estate taxes, property in the trust might be subject to other tax consequences, like the gift tax.
Do I Need a Lawyer for Help with an Irrevocable Living Trust?
There are many different options when it comes to deciding what type of trust is best for your circumstances and estate plan. It is important that you consult with an experienced estate planning attorney who understands all of the financial and tax consequences of creating an irrevocable living trust, especially since, as the name indicates, this type of trust cannot be revoked.
Irrevocable living trusts can include many different types of property, including life insurance, businesses, investments, real estate, and money. An estate lawyer can help you identify your goals for the trust and advise you on the best plan that takes into consideration all of your assets.