Irrevocable Living Trusts

There are several types of irrevocable living trusts, all with different advantages and purposes. They are designed to reduce state and federal taxes, protect property, provide protection from creditors, and protect wealth you wish to pass on to your beneficiaries.

As the name suggests, an irrevocable living trust cannot be changed by the grantor once the trust has been established. Any assets placed in the trust are no longer belong to the grantor, but rather the trust owns them. The grantor also cannot revoke the trust nor be the trustee. Once an irrevocable living trust is formed and funded, it’s permanent, though a few changes may be made under certain circumstances.

Reduce Taxes

Though death and taxes are the only two certainties, at least taxes are largely dependent on the value of your estate and whichever laws apply. Although Arizona does not have an estate or inheritance tax, there are other tax-related benefits of irrevocable living trusts to consider.

  • AB Trust – this benefits the surviving spouse and allows them to use or receive income from trust property. When the second spouse passes, the trust property passses to the beneficiaries. Any taxes are delayed until the second spouse passes.
  • QTIP and QDOT Trusts – a Qualified Terminal Interest Property (QTIP) trust delays estate taxes until the second spouse passes. A Qualified Domestic Trust (QDOT) is used instead if one of the spouses is not a U.S. citizen.
  • Generation-Skipping Trust – this benefits the children of the grantor by allowing for income from trust property. When the children pass, the trust property goes to the grandchildren. Taxes are delayed until the death of the grandchildren. There is a generation-skipping transfer tax as well.
  • Charitable Trusts – these name a charity as beneficiary. Some allow a named person to receive income during their lifetime and then pass trust property to a charity upon the person’s death. Others allow the charity to receive income for a specified time and then pass property to specific people.
  • Grantor Retained Income Trust – a (GRIT) allows the grantor income from trust property during a specific time period. There are a couple of types, and certain conditions need to be met to delay taxes.
  • Qualified Personal Residence Trust – a QPRT allows the grantor to transfer the title of their residence to the trust and live in the home rent-free for a certain period of time. The home then passes to the beneficiaries.
  • Life Insurance Trust – the trust owns a life insurance policy on the grantor. Proceeds from the policy are not taxable because they do not go to the grantor’s estate. However, the trust has to be in place at least three years before the grantor dies.

Protect Property

Certain irrevocable living trusts may be created to protect and preserve property, creating a barrier to creditors, protecting beneficiaries from poor choices, and meeting ownership requirements of some government benefits programs. Once property and assets are transferred to the trust, the grantor no longer owns them. Provisions can be put in place to prevent creditors of beneficiaries from going after trust property as well.

  • Medicaid Planning Trusts – these need to be in place for a certain amount of time before applying for Medicaid because of eligibility rules. Usually those rules require you to use most of your assets to fund your care before you can receive benefits from the program. However, once assets are transferred to an irrevocable trust, they cannot be considered in determining eligibility because you no longer personally own them.
  • Spendthrift Trusts – these are managed by a trustee to protect your gift. Some people are unable to wisely manage money or may be in too much debt. This allows you to pass on wealth with guidance.
  • Special Needs Trust – these are intended to provide support for beneficiaries with special needs without disrupting income and asset qualifications affect eligibility for government benefits.

Beneficiaries & Wills

It is important to think ahead and anticipate as many modifications you might wish you could make before creating the trust. An irrevocable living trust cannot be modified under most circumstances. Choose successor beneficiaries in case the original beneficiaries pass away. Should all beneficiaries pass before the grantor, the property will return to the grantor’s estate. (Probate, creditors’ claims, and taxes will then apply.) Additionally, consider making a “pour-over” will to leave any property to the trust.

If you already have an irrevocable living trust, please contact us for a review. FSG is happy to talk about the advantages and disadvantages of trust modification or termination, what action would be needed, cost, and benefits. For more information on trust types, tax-reduction strategies, and how an irrevocable living trust may protect your wealth and accomplish your estate planning goals, set up an appointment today.

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