Irrevocable Trust Information
An irrevocable trust can serve many purposes. A trust is a legal relationship that you can create to transfer or protect property. Irrevocable trusts are commonly used to safely hold property, to avoid probate and to provide tax benefits.
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Trust Description, Generally
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A trust is a legal relationship that involves three parties, including the trustor (meaning you, the person who creates the trust), the trustee (meaning the person who manages the trust and makes disbursements of trust property and income), and the beneficiaries (one or more people whom you name to benefit from the trust).
Irrevocable
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A trust can be irrevocable or revocable, as determined by you, the trustor. A revocable trust is one where the trustor can terminate the trust and reclaim the trust property at any time and without permission from anybody. An irrevocable trust, by contrast, is a trust that the trustor can only terminate with permission from either a judge, or the trustee and all of the beneficiaries. When the trustor creates the trust document, the trustor will decide whether to make the trust revocable or irrevocable.
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Why Give Up Control?
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An irrevocable trust provides benefits that a revocable trust cannot legally provide, including asset protection and tax savings.
Asset Protection
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Assume that you somehow end up owing a creditor a large sum of money, say, $200,000. This debt might be for a deficiency judgment on a home foreclosure or a judgment in an automobile accident case where you caused the accident. Whatever the reason, a $200,000 judgment entitles your creditor to seize and sell your property to satisfy the judgment. If you transfer property to a revocable trust, you retain control over the property in the trust, which means your creditors can seize that property. But, if you instead use an irrevocable trust, you lose control over the property, which means the property no longer legally belongs to you and cannot be seized by your creditors.
Income Tax Savings
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You can also save income tax money by using an irrevocable trust. For example, assume you fall into the 40 percent income tax bracket and you have investment property, such as an apartment unit, that produces $150,000 in rental income each year. At 40 percent, you pay $60,000 a year in income tax. But, if you transfer the apartment to a trust that falls in the 30 percent tax bracket, your trust pays only $45,000 in taxes, saving you $15,000 a year in income tax.
Estate Tax Savings
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An irrevocable trust can provide significant estate tax savings that a revocable trust cannot provide. However, the estate tax does not apply (as of 2009) to estates worth less than $3.5 million. If your estate value exceeds $3.5 million, you should see an accountant and estate planning attorney to plan your trust, because the rules are complex.
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