About Irrevocable Trusts
An irrevocable trust is established to allow a person to make gifts to an estate, either by will or during life, thereby relinquishing ownership and control of those assets. A person would set this up either to save income and estate taxes, to control the ultimate distribution of assets, or a combination of the two. Because an irrevocable trust benefits larger estates, it has limited application. Once established, it cannot be broken by the person setting it up,
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Significance
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For people with sizable estates, the irrevocable trust can be the most useful way to reduce taxes or control the distribution of assets.
Types
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There are several types of irrevocable trusts. One of the most common is one created on behalf of a spouse, called a bypass trust, and it shields assets from federal estate tax so an heir may receive more. A person can realize significant tax advantages by creating a so-called charitable remainder trust whereby he receives the income during his lifetime, and the assets of the trust benefit charity upon his death. A life insurance trust can be created to receive one's insurance without federal estate tax. There are tax advantages to setting up a generation-skipping trust to benefit ones grandchildren.
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Time Frame
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An irrevocable trust can terminate at the death of its creator, or it can be in existence in perpetuity. For example, one may create a trust for the benefit of an infirm child who will rely on the trust for care, rather than having the the assets go to that child directly. Or in the case of a charitable trust, it can be drawn so that it will remain intact with the charity receiving the income long after the death of its creator.
Warning
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An irrevocable trust is a complex document that must comply with the rules established by the IRS. Many people foolishly attempt to save money by creating one themselves, only to be subject to massive taxes and penalties. Seek out an attorney who is knowledgeable of estate planning and tax law.
Considerations
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It takes considerable time for an irrevocable trust to be developed and its cost can be steep, given the complexity of the document. If an irrevocable trust is appropriate to your planning, be prepared to spend several thousand dollars in attorney fees to create one.
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