An irrevocable trust is a trust that can’t be modified or terminated without the permission of the beneficiary. The grantor, having transferred assets into the trust, effectively removes all of his or her rights of ownership to the assets and the trust. One of the major purposes behind establishing an irrevocable trust is to remove any property within the trust as part of the decedent’s estate thereby removing any estate tax implications with respect to said property.
The transferred property may implicate gift taxes at the time of the transfer, however any appreciate of the transferred property may be sheltered from federal and Massachusetts estate tax at the death of the donor.
Circumstances that may implicate the use of irrevocable trusts include life insurance proceeds, passing down of a primary residence, proving for individuals with special needs and trust planning for future generations.
When considering whether to open an Irrevocable Life Insurance Trust (ILIT), it is important to understand the value of the combined estate of the insured and spouse. If the ILIT is appropriately executed, then the benefit in terms of potential tax implications is substantial. The trust, because of its nature as irrevocable, would no longer be included within the decedent’s estate for estate tax reasons. You need to be careful when establishing an ILIT to in understanding the implication of actively maintaining the policy, the importance of the manner in which the trust is created, the nature of the policy as irrevocable and any income tax implications based upon policy contributions.
A supplemental needs trust sets aside assets for the benefit of disabled person and contemporaneously preserves that person’s eligibility for public benefits. In order to be eligible for certain benefits, the person applying for such benefit must have resources below a certain market threshold.
For tax planning reasons, many parent and grandparents choose to establish an irrevocable trust for control of ones long-term estate plan. These trusts serve an integral purpose in the estate plan goals of some individuals, but may not avoid income tax, gift tax, and generation skipping tax or estate tax implications.
Many individuals interested in long term estate planning will opt to establish a Grantor Retained Annuity Trust (GRAT). A GRAT allows the transferor to retain an interest in the trust property as a set dollar amount or fixed percentage (which may increase per the terms of the trust) of the initial market value of the asset at the time of transfer. This tax planning tool allows the grantor to minimize any tax implications while maximizing the transfer to future generations without any estate or gift tax implications.
A Qualified Personal Resident Trust (QPRT) is an irrevocable trust that holds a personal residence. The donor to the trust keeps an interest in the property for a fixed number of years and during that time is responsible for the expenses associated with the property. The donor would likely reserve a right to lease the property thereafter according to fair market value. If the donor dies during the fixed year interest in the property, the property would be considered part of the decedent’s estate. However, if the donor outlives the fixed term of the QPRT, then the property will not be includable in the decedent’s estate and not taxable for that purposes.
There are a multitude of other reasons to create irrevocable trusts including some of the more popular include charitable purposes trusts, the Qualified Terminable Interest Trusts (QTIP) used to transfer property to a spouse preserving qualifying under the marital exemption, and the Qualified Domestic Trust (QDOT) for spouses that are non-citizens.