Unlike a revocable trust, an irrevocable trust generally can’t be changed once created, but it offers two major benefits: removing assets and their future growth from your taxable estate, and protecting those assets from creditors. With proper planning, it’s possible to retain meaningful access and control while still capturing these benefits.
Revocable vs. Irrevocable Trusts
Many people have executed a revocable trust, which as the name implies may be revoked or modified at the discretion of the person who created it, known as the grantor. The grantor typically retains all decision making regarding the trust assets. If the trust is properly funded, the grantor’s assets will avoid probate upon death and will either remain in trust for the benefit of the beneficiaries or be distributed outright, depending on the terms of the trust.
In contrast, an irrevocable trust generally cannot be changed or revoked, and to obtain its benefits the grantor must usually name someone else as trustee. So why would anyone give up control of their assets? There are two main reasons.
Why Give Up Control? Reason One: Estate Tax Savings
The first is estate tax savings. Gifts made to an irrevocable trust are no longer part of your taxable estate because you no longer own the assets. You can contribute up to $19,000 per year per beneficiary free of gift tax, provided the trust gives beneficiaries certain withdrawal rights, or you can transfer stocks, real estate, or shares of a business using your unified credit. Those assets and all their future growth escape estate taxation. For example, if you transfer $20 million to an irrevocable trust and it grows to $50 million by the time you die, your heirs could avoid a 40 percent estate tax on that entire value.
Why Give Up Control? Reason Two: Asset Protection
The second benefit is that assets in a properly structured irrevocable trust are protected from claims of creditors.
How to Keep Some Control While Still Getting the Benefits
What most people really want is tax savings and asset protection while keeping some control. There are ways to accomplish this. If your spouse makes the gift, you can serve as trustee with certain limitations and also be a beneficiary, giving you access to funds if you ever need them. If you are not married, some states such as Nevada and South Dakota allow you to be a beneficiary of your own irrevocable trust. With proper planning, you can protect assets and reduce taxes for your children while maintaining meaningful control.
Singer Wealth Advisors is a registered investment advisory firm. Discuss with your financial/tax professionals before investing. Investing involves risk. Past performance does not guarantee future results. SWA is not a law firm. Legal Services offered through Keith Singer PLLC. Material provided for informational purposes only.
FAQ Section
What’s the difference between a revocable and an irrevocable trust?
A revocable trust can be changed or revoked by the grantor at any time, while an irrevocable trust generally cannot be modified once created, and the grantor typically must name someone else as trustee.
Why would someone use an irrevocable trust?
The two primary reasons are estate tax savings, since assets and their future growth are removed from the grantor’s taxable estate, and asset protection, since properly structured trust assets are generally shielded from creditor claims.
Can I still access funds in an irrevocable trust?
Depending on the structure, it may be possible to retain some access. For example, if a spouse makes the gift, the other spouse can sometimes serve as trustee and beneficiary. In certain states, an individual may also be able to be a beneficiary of their own irrevocable trust.
How much can I gift to an irrevocable trust each year without gift tax?
Individuals can generally gift up to a set annual amount per beneficiary free of gift tax, provided the trust includes certain withdrawal rights for beneficiaries, or use their lifetime unified credit for larger transfers.
Keith Singer
Ready to Take The Next Step?
For more information about any of the products and services listed here, schedule a meeting today or register to attend a seminar.