how an irrevocable trust works
irrevocable trusts are primarily set up for estate and tax considerations that s because it removes all incidents of ownership removing the trust s assets from the grantor s taxable estate it also relieves the grantor of the tax liability on the income generated by the assets 1 while the tax rules vary between jurisdictions the grantor can t receive these benefits if they are the trustee the assets held in the trust can include but are not limited to a business investment assets cash and life insurance policies trusts have an important place in estate and legacy planning but there is a downside the cost setting up any type of trust can be complicated enough that an attorney is necessary and this means that people may end up spending a few thousand dollars or more in attorney fees to set them up irrevocable trusts are especially useful to individuals who work in professions that may make them vulnerable to lawsuits such as doctors or attorneys once an asset is transferred to such a trust it is owned by the trust for the benefit of its beneficiaries therefore it is safe from legal judgments and creditors since the trust will not be a party to any lawsuit today s irrevocable trusts come with many provisions that were not commonly found in older versions of these instruments these additions allow for much greater flexibility in trust management and distribution of assets provisions such as decanting which allows a trust to be moved into a newer trust with more modern or advantageous provisions can ensure that the trust assets will be managed effectively 2 other features that allow the trust to change its state of domicile can provide additional tax savings or other benefits although they are commonly associated with the very wealthy trusts are an important piece of estate planning for anyone regardless of income status types of irrevocable trustsirrevocable trusts come in two forms living trusts and testamentary trusts a living trust which is also known as an inter vivos latin for between the living trust is originated and funded by an individual during their lifetime some living trust examples are testamentary trusts on the other hand are irrevocable by design that s because they are created after the death of their creator and are funded from the deceased s estate according to the terms of their will 3 the sole way to make changes to a testamentary trust or cancel it is to alter the will of the trust s creator before they die irrevocable trust usesan irrevocable trust has a grantor a trustee and a beneficiary or beneficiaries once the grantor places an asset in an irrevocable trust it is a gift to the trust and the grantor cannot revoke it the grantor can dictate the terms rules and uses of the trust assets with the consent of the trustee and the beneficiary 45irrevocable trusts can have many applications in planning for the preservation and distribution of an estate including an irrevocable trust is a more complex legal arrangement than a revocable trust because there could be current income tax and future estate tax implications when using an irrevocable trust seek a tax or estate attorney s guidance irrevocable trusts vs revocable trustsrevocable trusts may be amended or canceled at any time as long as their creator is mentally competent they do offer the benefit of allowing their creator to cancel them and reclaim property held by the trust at any time before death however such trusts do not offer the same protection against legal action or estate taxes as irrevocable trusts 8