Irrevocable Trusts have numerous benefits to the grantor, the beneficiary, and the estate if established and managed properly.
- Irrevocable Trusts are a good resource for those seeking to plan for their estate due to the numerous benefits that they contribute.
- You can be tax-efficient by properly gifting property into an irrevocable trust.
- Professional third-party trustees are the best option when determining who your trustee will be.
Irrevocable Trusts vs. Revocable Trusts
A trust is a legal written agreement that places property within the possessions of the trust, which is overseen by a trustee. An Irrevocable Trust is a type of trust fund that prohibits the grantor from removing property and unilaterally changing the terms of the trust once it has been established. This differs from a revocable living trust (RLT) in that an RLT enables the grantor to change the terms of the trust at any time, or remove property from the trust once it has been established.
The Grantor, the Trustee, the Beneficiary, and How They Are Chosen
Note that these terms describe the parties in a trust agreement. The Grantor is the person who is establishing the trust. The Grantor can be the party who writes the trust agreement, but often will seek the help of an attorney or service such as Kiss Trust or Legal Zoom.
The Trustee is the party who oversees and manages the trust. It will be clearly stated who the trustee will be in the written trust document. The trustee can be a related party to the Grantor, while third-party trustees (such as Eastern Point Trust Company) are disinterested parties, which maximizes the accuracy of following the terms of the trust.
The Beneficiary is the receiver of the property within a trust, and more than one beneficiary can be named in a trust. They are chosen by the Grantor, and clearly stated within the terms of the trust. A trust can have multiple tiers of beneficiaries, such as the primary beneficiary, contingent beneficiary, and excluded beneficiaries. Different types of beneficiaries are named in order to ensure that the Grantor can dictate to whom, how and where the property will be distributed, despite circumstances and events that may cause the original terms of the trust to be invalid – such as an unexpected death of the primary beneficiary.
Choosing the Right Trustee and Trustee Duties
The Trustee’s main duty is to follow the trust agreement. With this being said, it is imperative to choose the trustee wisely to ensure that your trust is being managed properly. Anybody can be named as the trustee of your trust, for as long as it is stated clearly within the trust agreement. Electing your first cousin to be the trustee of your trust may be easy, but could pose several problems. First, appointing a family member is risky because they have conflicting emotions and motives when performing duties for the family. It may be hard for them to strictly enforce distribution penalties for fear of losing their good relationship with the beneficiaries. Also, they likely lack the necessary legal, tax and financial education resources to be a prudent fiduciary in the relationship formed by the trust agreement.
A trustee has many duties, such as being a fiduciary to the grantor. A fiduciary relationship is the strictest relationship in the eyes of the judicial system, so a breach of the contract formed by the trust could impose severe punishment (Read The Fiduciary Series). The two main roles of trustees are to (1) invest the assets and manage the property in the trust (2) make distributions within the guidelines of the trust; also, the trustee must act in the best interest of the grantor.
Disinterested parties tend to have no conflicts when acting as the grantor’s fiduciary, therefore making them more dependable trustees. There’s a saying: “They can’t hear the bedroom door slam” – meaning third-party fiduciaries can act more clearly and prudently when dealing with distributions and direction of the trust property without having conflicting personal matters clouding their decisions.
Tax Benefits of Irrevocable Trusts
Irrevocable Trusts also have tax benefits, as well as some less noticeable benefits, such as:
- Reducing the amount of your taxable estate by gifting assets to the trust.
- Set the times and reasons for distributions, which may determine the type of tax paid on gains (Short-Term/Long-Term Gains/Losses).
- Protection from creditors and lawsuits – once the property is under the protection of the trust, it is not vulnerable to creditors – as the assets are property of the trustee acting for the grantor, not the grantor.
- Under the Crummey Withdrawal Right, the grantor can avoid paying gift tax by notifying the beneficiaries of their right to withdraw the funds that are being gifted.
- Avoid paying taxes on appreciation of property (i.e. real estate) by placing the property within the trust.
- Up to $5,000,000 can be gifted tax-free into the trust, which is why some transfer real estate into the trust for future beneficiaries.
Can Future Additions Be Made Once The Trust Is Created?
Irrevocable Trusts are irrevocable since the grantor may not revoke the gifts made into the trust. There is no limit to the value of assets within a trust, and gifts can be made at any point of a trust’s lifespan (and if the beneficiaries are notified, then it may be gifted without a gift tax under the Crummey Withdrawal Right). It is recommended that the grantor make several gifts to the trust, and utilize the Crummey Withdrawal Right since it is a valuable advantage when making additions.
Starting an Irrevocable Trust
Becoming fluent with estate planning terminology is the hard part, but creating a trust doesn’t have to be. It used to be a lengthy and expensive process to create a trust, but with Kiss Trust, creating a trust can take as little as a half an hour for as little as $49.
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