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What should you know about irrevocable trusts in estate planning?

On Behalf of | Mar 12, 2024 | Estate Planning

A comprehensive estate plan is important for all adults. One of the primary purposes of an estate plan is to provide information about what to do with your assets when you pass away. There are many options available to achieve this end effectively.

One option that you have is to establish a trust. Irrevocable trusts are one category of these estate planning tools. Once you establish and fund an irrevocable trust, you can’t change the terms or void the trust without the permission of the beneficiaries or the court. In exchange for that loss of control, you’ll benefit from several advantages.

Tax advantages

Irrevocable trusts offer significant tax benefits. By transferring assets into an irrevocable trust, these assets are no longer considered part of the grantor’s estate for tax purposes. This transfer can lead to a reduction or even elimination of estate taxes upon the grantor’s death. An irrevocable trust allows individuals to mitigate the impact of these taxes, potentially saving a substantial amount in estate tax liabilities.

These trusts can also provide income tax benefits. In some cases, the income generated by assets within the trust may be taxed at a different rate than if the income were to accrue directly to the grantor. The specific tax implications depend on the trust’s structure and the type of assets involved.

Asset protection and control through irrevocable trusts

Another critical benefit of irrevocable trusts is their asset protection. Since the assets transferred into the trust aren’t owned by the grantor, creditors and legal judgement typically can’t access them. This makes irrevocable trusts an effective tool for individuals concerned about potential future lawsuits or creditors, as it ensures that the assets intended for beneficiaries are preserved.

Irrevocable trusts allow grantors to set terms for the distribution of the assets after the grantor’s death. This is particularly beneficial for individuals who wish to specify conditions or milestones to be met before beneficiaries can access their inheritance. This level of control helps ensure that the grantor’s wishes are carried out exactly as intended, even after their death.

An irrevocable trust is only one potential part of a comprehensive estate plan. Working with a legal professional to establish an estate plan helps ensure that everything is handled lawfully and in ways that meet an individual’s needs.