Irrevocable Living Trust Agreement
Irrevocable living trust agreements are an effective estate planning tool. When formed correctly, it can reduce estate tax liability as well as provide benefits to heirs. The most important concept to understand about these types of trusts is that they are irrevocable, meaning they are not alterable. Although this does provide many benefits for tax purposes, many individuals are uncomfortable with giving up entire control of their own property.
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Definitions
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Several key terms are used often when talking about irrevocable trusts. The "grantor" is the person who contributes the assets to the trust and loses control of those assets. The "trustee" is the third party who takes control of the assets and manages them in the best interest of the trust and its beneficiaries. The "beneficiary" is the designated person who will receive benefits from the managed trust account. The "trust agreement" is the written and signed document that outlines all the powers of the trustee, the parties involved, the assets funding the trust and all other relevant information.
Formation
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Irrevocable trusts can be created several ways. If set up during the grantor's lifetime, the assets put into the trust are unable to be used for the remainder of the grantor's life. If an individual has a revocable trust (alterable) and then dies, this trust automatically becomes irrevocable unless otherwise directed by the trust agreement. Irrevocable trusts also can be set up through direction in a decedent's will or another irrevocable trust.
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Benefits
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Since the grantor is giving up control of the assets in the irrevocable trust, he technically does not own these assets. Therefore, after the grantor dies, these assets will not be included in his gross estate (all property owned by the decedent). As the gross estate is minimized, so is the possible estate tax due. Probate is also avoided using irrevocable trusts. In addition, an irrevocable trust gives the grantor a chance to provide for his heirs after his death. A final benefit of irrevocable trusts is asset protection.
Types of Assets
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Irrevocable trusts can be funded with most any type of assets. The most common are cash, stocks, bonds and life insurance. An irrevocable trust funded with life insurance is a special and common type of irrevocable trust called an irrevocable life insurance trust (ILIT ). An ILIT provides the same benefits of any other irrevocable trust but also has the benefit of providing life insurance for the grantor.
Consideration: Three-Year Rule
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One consideration that must be brought to light when setting up an ILIT is that the assets must be out of the grantor's name for at least three years. If not, the assets will be included in the grantor's gross estate. If the assets are out of the grantor's ownership for more than three years, the full benefits of the irrevocable trust can be used.
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References
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