How to Transfer Assets Into an Irrevocable Trust

The hallmark of an irrevocable trust is the grantor's surrender of ownership interest in the assets of the trust. Generally, under state laws, the irrevocable trust simply cannot be amended, modified or revoked by the grantor. The IRS rules on estate taxation are much stricter, and to have the trust recognized as a separate tax entity outside an estate, the grantor must not have possession of the assets, lingering control over the disbursements to the beneficiaries, or any direct financial interest in the trust assets. This makes irrevocable trusts an ideal vehicle for holding life insurance policies, in which the grantor usually has no stake.

Difficulty: Moderate

Instructions

1. Identify assets in a trust instrument. To establish a trust, some initial assets must be transferred to serve as the corpus and be named as such in the trust instrument. Additional assets can be added over time, or the entire corpus can be named in the trust instrument.

2. Establish trust account, if necessary. If the trust is going to own cash or financial assets, these should be held in a separate account. Banks and most retail brokers allow the creation of trust accounts, and will likely need a copy of the trust instrument. Transferring cash, securities or equities constituting all or part of the corpus named in the trust instrument perfects the document, consummating the trust.

3. Transfer title to the trustee. If the grantor acts as the sole trustee, he risks making the trust defective as an irrevocable trust for tax purposes. To be effective as an irrevocable trust, an independent trustee should possess the title to all trust assets in property. Property can be retitled through a deed. Cash and financial assets can be transferred to an account to which only the trustee has access.

4. Purchase life insurance. A life insurance policy can be purchased by the grantor with the trust or trustee (in trust) as the named beneficiary. However, when determining whether the insurance proceeds are eligible for inclusion in the estate for estate tax purposes, the IRS applies a strict incidents of ownership test similar to that used with an irrevocable trust. To prevent estate tax on the insurance proceeds, the grantor should assign all rights in the policy to the trustee or some other individual.

Tips & Warnings

• Unlike revocable trusts (and other grantor trusts), irrevocable trusts are funded with after-tax donations. This means that the transfers to the trust are not subject to the gift tax or gift tax exclusions. They are, however, taxed at a rate higher than most settlor's individual tax rate, which is why many irrevocable trusts are designed to pay most or all of their annual income to the beneficiaries.
• The transfer of real property subject to a mortgage can result in the full balance of the loan becoming due immediately. Always contact the lender before transferring real property subject to a mortgage.

Resources

• IRS Trust Questions and Answers
• Magic of Irrevocable Trusts
• Estate and Gift Tax FAQ