Trusts are an integral and essential component in our estate planning. They can be used as a tool to accomplish our client’s desires for how their wealth will be managed, controlled and ultimately distributed. There are many different types of trusts, but all trusts are either revocable or irrevocable. The grantor of a revocable trust is able to freely modify or terminate the trust at any time, while the grantor of an irrevocable trust relinquishes the ability to freely modify or terminate the trust. At Katz Baskies & Wolf PLLC, our trust attorneys are well-versed in the benefits and pitfalls of irrevocable trusts, and are able to determine when it is in our client’s best interest to incorporate irrevocable trusts into their estate planning.
Advantages of Irrevocable Trusts
There are several advantages to planning with irrevocable trusts, including:
- Asset Protection: By placing your assets in certain irrevocable trusts, you are able to make them judgment proof. This is especially helpful for professionals and other individuals that are often involved in lawsuits – or concerned about creditors.
- Tax Avoidance: Irrevocable trusts that can be constructed to reduce or avoid taxes on the assets placed within the trust. Tax-motivated irrevocable trusts may benefit spouses, children, future descendants, charities or other beneficiaries. At Katz Baskies & Wolf, our experienced estate planning attorneys can review tax planning opportunities with irrevocable trusts with you to determine if it is applicable in your particular circumstances.
- Irrevocable Life Insurance Trusts: Oftentimes, life insurance trusts are created to own policies on our clients lives to avoid estate taxation on the death benefits.
- GRATs and QPRTs: Certain irrevocable trusts are structured to transfer your wealth to your beneficiaries while retaining certain rights in the trusts. For example, in a Grantor Retained Annuity Trust (a “GRAT”), the trust will pay you back a set amount each year for the term of the GRAT; while in a Qualified Personal Residence Trust (a “QPRT”), the trust will allow you to live rent-free in the residence for the term of the QPRT.
- Grantor Trusts: Certain irrevocable trusts may be structured to avoid inclusion in the client’s estate while still causing the client to be liable for the income taxes on the assets in the trust (a “grantor trust”). Using grantor trusts in your estate plan may allow the transfer of wealth in a very tax-advantageous manner. Grantor trusts are often “seeded” with an initial gift and then the grantor frequently sells assets to the grantor trust or loans funds to the grantor trust in exchange for a promissory note from the trust.
Disadvantages of Irrevocable Trusts
Irrevocable trusts have two distinct disadvantages:
- It can be difficult to modify or terminate an irrevocable trust – certainly it is much harder to change than a revocable trust.
- Under certain circumstances irrevocable trusts may incur higher income taxes, as the income tax “brackets” are compressed for trusts.
Find Out More About How Irrevocable Trusts May Benefit You
Determining whether or not to place your assets in irrevocable trusts is an endeavor best suited to experienced estate planning attorneys. At Katz Baskies & Wolf, our attorneys will review your financial statement with you, and together with you will formulate a plan that accomplishes your short and long-term goals. Contact our firm to find out more information and schedule an initial consultation.