When formulating your estate plan, there are many issues that need to be considered. One possible tool in the planning process is an irrevocable trust. An irrevocable trust generally cannot be modified or terminated without the consent of the beneficiaries. There are several reasons why an irrevocable trust may be a helpful tool. These include lowering estate taxes, providing a pool of liquidity to pay estate taxes, protecting a large sum of money left to a minor or to an adult who may not handle the funds responsibly, or to create asset protection.
At Colby&Thornes, our Scottsdale estate planning attorneys know the benefit and the potential pitfalls of an irrevocable trust. They can advise you whether it will assist in your estate plan, and make sure that it is properly established and administered. Contact us to schedule an appointment.
An irrevocable trust, generally, cannot be rescinded or modified by the settlor/grantor after it is created. Irrevocable trusts can hold any type of assets, including a life insurance policy paid on the death of the settlor/grantor, called an ILIT. Generally, the settlor/grantor gives up all rights of control and management of any ILIT or other irrevocable trust when created. But the settlor/grantor does decide who the beneficiaries will be, and the terms under which they will receive the proceeds of the life insurance policy or any other assets owned by the ILIT or other irrevocable trust.
Assets transferred by the settlor/grantor to an ILIT or other irrevocable trust are subject to federal gift tax laws, and if the value of the assets transferred by the settlor/grantor to the ILIT or irrevocable trust exceeds the annual exclusion amount for any tax year (based on a published IRS table), a Form 709 gift tax return must be filed.
When we sit down and discuss your goals, a decision will be made as to whether an ILIT makes sense in your situation. If so, several questions must be addressed, including:
These questions must be resolved in a manner that achieves your goals, while avoiding the creation of additional problems, including tax liability.
The primary benefit of an irrevocable trust is to provide funds for family and loved ones, without having the proceeds included in your estate for tax purposes. This will apply to life insurance death benefits of an ILIT or to other assets gifted by the settlor/grantor to any other irrevocable trust holding assets other than life insurance. You can dictate how and under what circumstances the funds will be distributed. The funds can replace earnings for family members, provide for the education of children and/or grandchildren, cover the costs of final expenses, and provide liquidity to pay taxes. And because the trust owns the policy, and not the beneficiaries, an ILIT and other types of irrevocable trusts can provide a measure of asset protection from creditors of those beneficiaries.
Of course, in order to enjoy the benefits of an ILIT or other irrevocable trust, it must be properly designed, drafted and administered, and all gift tax laws must be followed.
There are several potential pitfalls that could sabotage the goals you are seeking to reach when you go about setting up an irrevocable trust or ILIT. They include:
At Colby&Thornes, we are knowledgeable and experienced estate planning attorneys. Contact us to find out how an irrevocable trust can make a difference in achieving your estate planning goals.
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