Irrevocable Trust Tax Information
An irrevocable trust is a type of estate planning device that cannot be altered once you set it up. Even though it is inflexible once established, it can also provide you with tax benefits and can have a direct impact on the amount of estate taxes your beneficiaries have to pay when you pass away.
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Irrevocable Trust
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When you set up an irrevocable trust, you can put many different types of assets inside. For instance, you can put stocks, bonds, real estate and many other types of property. Once you but these assets into the trust, they cannot be removed by you. Only the beneficiary of the trust can alter the terms of the trust agreement once it has been set up. Once you put something into the trust, it is removed from your estate.
Tax Return
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When you set up an irrevocable trust it is a separate legal entity. If the trust generates an encounter investments, it has to have a tax return filed for it. This means that you have to handle the process of filing a tax return for the trust on an annual basis. Depending on the arrangement, the trustee of the irrevocable trust could handle this for you. If the taxes are not paid, the Internal Revenue Service could seize assets in the trust.
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Transfer Tax Liability
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Irrevocable trusts are typically used to transfer tax liability from one person to another. For example, if you own stock and you sell it, the capital gains would be taxed at your marginal tax rate. If you give the stock to a beneficiary, the capital gain can be taxed at his marginal rate. If you still want to control the stock, you can put it into an irrevocable trust.
Estate Taxes
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Using an irrevocable trust will help to avoid estate taxes. When you pass away, your estate could have estate taxes taken out of it before the assets are passed onto your beneficiaries. If your estate is larger than the annual estate tax exemption, the estate is taxed at a high estate tax rate. By putting some of your assets into an irrevocable trust, you can remove them from your estate and get under the estate tax exemption.
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