Irrevocable Trusts: What Are They and How Are They Used?

Irrevocable Trusts: What Are They and How Are They Used?

 In Wills & Trusts

“Why would anyone want an irrevocable trust?” It’s a common question we get. “You can’t take back what you put in!? You can’t have absolute control!? You can’t own what’s in the trust!? Geesh!”

But that’s exactly the point; irrevocable trusts’ main purpose is to separate people from their assets.

This creates a distance that tax and property laws respect, and that earns points if you’re trying to protect your assets or save on taxes. Trusts are irrevocable if you put assets in that you cannot remove carte blanche.

what are irrevocable trusts?

Irrevocable trusts can protect assets against your own future creditors, help you qualify for benefits, and lower income tax liability. Some trusts can freeze or discount the dollar value of the transfer that takes effect at your death, saving estate taxes. Irrevocable trusts can even remove an asset from your estate altogether, after you have had lifetime use.

All revocable trusts that you create are irrevocable to your heirs because you are the only one who can revoke them.

At your death, when all your trusts become irrevocable, the trusts can protect your heirs from your estate taxes, their estate taxes (known as a generation skip), as well as their debts, divorces, disabilities, destructive habits, and disputes over inherited business, property, and other assets.

How do irrevocable trusts save taxes?

1. State income taxes can be saved by placing the assets in a non-grantor irrevocable trust, which is then deliberately situated in a non-tax jurisdiction. 

Trust Example:

  • Delaware Incomplete Non-Grantor (DING) Trust: Avoids state income tax in your state by being situated in Delaware, which is one of the states that does not tax trusts of out-of-state grantors.

2. Estate taxes can be saved by making a gift of the assets to the trust.

Trust Examples:

All three of these common trusts remove assets from the grantor’s estate or freeze the value for transfer tax purposes (a tax levied on the transfer of property ownership from one entity to another). You may use up exemption from gift and estate taxes by making large gifts, but you still freeze the amount at today’s value, saving taxes later when they have gone up in value.

How do irrevocable trusts protect assets?

Assets can be protected against claims by putting them beyond the reach of the grantor and the beneficiaries.

Trust Examples:

  • Income-Only Trust or Legacy Asset Savings Trust (LAST Trust™): Protects assets from nursing home cost spend-down by transferring your assets, while retaining the right to income earned from those assets
  • Lifetime QTIP Trust: Provides your spouse income for life with limited access to principal. This allows your income to be shifted to your spouse, and provides protection for claims against you or your spouse.
  • Family Health Trust™: Allows your children to shelter assets you may have given them earlier for use in promoting the health of family members, including yourself

As you can gather, there are lots of irrevocable trusts that can be used for many different circumstances. The options are truly endless. This allows us to be creative when drafting the perfect irrevocable trust to suit your unique needs.

If you’d like to discuss how an irrevocable trust could fit in with your estate plan, you can book a 15-minute consultation with one of our paralegals to start the conversation.

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