First off, you may be wondering what an irrevocable trust is; or you may be unfamiliar with trusts in general and need to know more before considering one. Essentially, a trust is a legal arrangement that provides for the ownership, management, and distribution of your property for the rest of your life, as well as after you are gone.
What is an Irrevocable Trust?
An irrevocable trust differs from a revocable trust in that once the trust is put in place, the terms and provisions within the trust cannot be changed by the grantor. Basically, the grantor is relinquishing many of their rights to the property in the trust, and are entrusting this property to the trustee.
Who Owns the Trust?
If a settlor sets up a revocable trust, then he or she still owns the assets in the trust because he or she can revoke the trust at any time. However, if the settlor creates an irrevocable trust, then the beneficiary owns the assets because the trust cannot be terminated.
Who is the Trustee?
The settlor or the family member may serve as the trustee with a revocable trust because the settlor still owns the assets of the trust. However, with an irrevocable trust, to protect the assets of the trust, the settlor should identify an independent person to serve in that fiduciary capacity.
What Are the Advantages Of An Irrevocable Trust?
The main reason people benefit from setting up an irrevocable trust, has to do with tax liability. The grantor no longer has to include the assets in the irrevocable trust in their estate's overall taxable assets. This makes the assets given over to the irrevocable trust tax exempt, as they're no longer included in the gross estate when filing taxes. Other benefits include
- Control of Your Estate: One of the benefits of choosing an irrevocable trust is that doing so helps you to retain control over your property and estate when you are gone. You can make precise stipulations for how your property should be divided, and to an extent you can control how your assets are used. You can also make contingency plans that will determine what should be done with your estate should beneficiaries die or become divorced. This gives you greater flexibility to control what happens to your estate once you are no longer around to manage it yourself. We offer estate planning services that you can explore today.
- Retained Income: Many people are worried that by transferring their estate to a trust, they will lose their entire cash flow, as they will no longer have access to their assets. However, stipulations can be made in an irrevocable trust that would give you access to any income and interest accumulated on your property. For many individuals, this helps give them a sense of freedom, as they do not feel trapped by the trust since they still have access to a certain amount of income.
- Tax Advantages: Oftentimes, individuals want to execute estate planning so that their beneficiaries don’t pay more in taxes than necessary on their inheritance. However, some people falsely believe that gifting their property to their descendants before they die is the best way to do this. Unfortunately, even when gifting property, your inheritors will be responsible for hefty capital gains taxes. However, by transferring your estate to a trust you can limit the amount of taxation your estate is subjected to before it reaches your beneficiaries.
- Beneficiary Benefits: The benefits paid to your beneficiaries after your death are not subject to federal unless there is income or estate taxes.
- Charitable Donations: You can designate a charity to receive either income or a portion of the principal amount that is in the trust.
- Bypass Probate Process: Your assets can bypass the probate process upon your death and details about your holdings do not become a matter of public record.
- Earn Interest: It helps keep assets intact and earns interest that builds up in the trust. You can also include a mechanism that guards against heirs squandering their inheritance.
- Keep Your Income: You do not have to give up the income your assets produce.
Planning Your Irrevocable Trust
When it comes to trusts, advanced planning is a good approach to protecting your holdings. Being informed and having an attorney to represent you are crucial to proper arrangements for your long-term care needs. One important role of an irrevocable trust is protection in the case of a serious illness such as Alzheimer’s. Placing everything into it can help minimize loss of control because the trustee is typically an independent person chosen by the Grantor. He or she manages the assets in the trust and is bound by its provisions.
Irrevocable Trusts Through a CPA
Hiring experienced and knowledgeable CPAs like Chandler & Knowles, will help you decide which direction is right for your situation. The main objective is to guard your estate against probate and high taxation, while expertly managing your trusts and investments for maximum growth. Choosing a financial service you trust, is vital for the long-term commitment needed in successful estate planning.
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