Sophisticated estate planning often employs irrevocable trusts, which may be used for a variety of purposes, including minimizing transfer taxes, protecting assets, and preserving eligibility for public benefits. Irrevocable trusts include the following:
- Special needs trusts. The principal purpose of a special needs trust is to preserve government benefits for a disabled or aged beneficiary.
- Permanent trusts. A permanent trust is designed for the prolonged management of transferred assets. The trust objectives include immediate removal of the transferred property from one’s estate for estate tax purposes (which may constitute an immediate gift for gift tax purposes). The trust may be designed to ensure that the income from trust property will no longer be includable in one’s taxable income, but given the rates of federal income tax for trusts, irrevocable trusts are sometimes drawn intentionally to cause trust income to be taxed to the grantor.
- Trusts for children or grandchildren. Trusts for minors are permanent trusts that focus on the specialized circumstances and requirements of minors, including providing for education..
- Grantor retained interest trusts. These types of trusts allow the settlor to retain an interest in trust assets for a limited period of time, with the remainder interest passing to another person. These trusts include grantor retained income trusts (GRITs), grantor retained annuity trusts (GRATs), grantor retained unitrusts (GRUTs), and qualified personal residence trusts (QPRTs). These trusts are designed to minimize taxes by incurring a gift tax only for the remainder interest that follows the settlor’s retained interest, and may sometimes be structured so that no gift tax is due upon creation.
- Estate balancing trusts. If one member of a married couple is wealthy and the other has few assets, an inter vivos qualified terminable interest property (QTIP) trust can provide the less wealthy spouse with a taxable estate, thereby making it possible to take advantage of that spouse’s unified credit upon his or her death. An outright gift would accomplish this, but the QTIP trust permits the grantor to retain control of the trust estate.
- Charitable remainder trusts. A charitable remainder trust provides benefits to named individuals for a specified period of time, with the remainder interest passing to charity.
- Life insurance trusts. An irrevocable life insurance trust is typically used to remove the proceeds of life insurance from the insured’s estate, while making those proceeds available to pay estate taxes and other obligations.
- Asset protection trusts. An irrevocable trust can protect one’s assets from future creditors and lawsuits. But be warned that a transfer is unlawful and fraudulent if it is designed to thwart an existing or reasonably foreseeable claim. It is therefore important to do asset protection planning before a threat to your assets arises.
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