What is an irrevocable trust?
As you may guess, it is a trust that cannot be “revoked” or drastically changed. When you give property and assets to a revocable trust to manage and distribute according to rules you helped create, you keep the power to change, remove, sell, and use property and assets in the same way you do now. With an irrevocable trust, you lose the option to ‘take-back’ the assets.
Inflexibility with an irrevocable trust is not a commonly sought-out quality in an irrevocable trust. The most influential reasons for using an irrevocable trust in your estate plan arise when property in a trust is considered “yours” or “not yours.” There are some important times where an irrevocable trust can make sure that money is not considered “yours.”
Asset protection is an important goal for many prospective clients. Asset protection helps provide peace of mind in knowing that potential future events (like divorce, business troubles, or lawsuits) won’t risk financial security. Using an irrevocable trust helps keep the property you put in trust from being treated as “yours” if one of these events occurs and creditors try to reach the property you intend to protect.
Estate and Gift Tax
It’s important to note that, for many people, gift tax won’t be an issue and the estate tax will affect even fewer. They’re still worth considering, though. A brief explanation: the current estate tax paid out of your estate after death has an exemption of $11,580,000 for a couple in 2020, meaning that very few people will have to actually pay any taxes on money exceeding the exemption amount. Gift tax returns, by contrast, are filed annually when you give large gifts. They add up over your lifetime to reduce that $11.5 million exemption upon death. In 2020, a gift tax return has to be filed if one person gives one other person more than $15,000 in a single year (spouses can gift twice that, and couples can receive twice that).
Gift Tax: Money in an irrevocable trust can create gift tax liability, so irrevocable trusts can be a useful tool to avoid gift taxes. While trusts have their own tax and accounting responsibilities, putting property in an irrevocable trust is part of making sure that the IRS does not require you to file a gift tax return.
Estate Tax: If your estate is large enough to run up against the $11,580,000 exemption, making your trust irrevocable is part of keeping the IRS from considering that property as part of your taxable estate at death.
While a revocable trust provides flexibility, there are protections it cannot provide that ARE available in a properly drafted irrevocable trust. Irrevocable trusts can protect property from creditors, estate and gift tax, and [income tax?]. McCullough Sparks is experienced in drafting various specialized irrevocable trusts to provide for each client’s needs.