Tax Benefits of Irrevocable Trust

By Tom Streissguth

When you create a trust, you transfer your property and other assets into the care of a trustee. You can use a trust to transfer property to your heirs or to another person during your lifetime. A trust can also be used to shelter assets and income from creditors. An irrevocable trust, by definition, cannot be changed but carries some important tax advantages.

When you create a trust, you transfer your property and other assets into the care of a trustee. You can use a trust to transfer property to your heirs or to another person during your lifetime. A trust can also be used to shelter assets and income from creditors. An irrevocable trust, by definition, cannot be changed but carries some important tax advantages.

Basic Terms

The grantor of the trust sets the basic terms of the trust, including a designation of the trustee and instructions on how the assets will be handled within the trust and/or conveyed to the beneficiary. In a revocable trust, the person who establishes the trust may alter its terms and maintain access to the assets. In an irrevocable trust, the terms of the trust cannot be changed by the direction of the grantor, trustee or beneficiary. A trust must file IRS Form 1041 in each year in which it earns at least $600 in income. Grantor trusts — in which the creator of the trust keeps control of the assets — are not required to file Form 1041, as the income is taxable to the grantor who declares the income on his own Form 1040.

Protect your loved ones by a legally binding will. Make a Will Online Now

Estate and Gift Taxes

In the eyes of the IRS, an irrevocable trust includes property that no longer belongs to you, and so the assets will not be subject to estate tax after your death. Although a revocable trust can help your estate avoid probate court, it does not shelter assets from the estate tax. The IRS does allow you to transfer as a gift to another person (or trust) as much as $13,000 each year, as of publication ($26,000 if you are married, filing a joint return) without incurring gift tax.

Income Taxes and Life Insurance

In addition, transferring assets to an irrevocable trust can save on annual income taxes. The grantor of the trust is not personally liable for income taxes on trust income; the tax liability belongs to the trust itself. The variation in income tax brackets also allows you to move assets to a trust that enjoys a lower tax rate. If the irrevocable trust includes a life insurance policy, then the benefits paid to your beneficiaries after your death are not subject to federal income or estate taxes.

Charitable Donations

With an irrevocable trust, you can also designate a charity to receive either income or a portion of the principal amount that you place into the trust. The IRS rules allow you to avoid capital-gains tax on any donated money, and in some forms of trusts to deduct interest earned by the trust and donated to the charity. Assets donated to the trust do not count as part of your estate; you may also change the charity which receives the assets.

Protect your loved ones by a legally binding will. Make a Will Online Now
Family Trusts & Gifts

References

Related articles

How Does a Living Trust Protect Assets?

Creating a trust to holds assets can help the grantor while he is alive and continue to serve him after his death. A living trust is created during the grantor's lifetime. It transfers title (ownership) of the grantor's property into the trust to be managed by a trustee for the benefit of a designated beneficiary. There are different types of living trusts and each can protect assets in a different way -- or not at all.

Can a Trustee Revoke or Amend a Revocable Trust in Colorado?

If you are looking for a way for your estate to avoid the costs and complications of a court-supervised probate process after your death, a revocable trust could help. When you put all your assets into a Colorado revocable trust, or living trust, the trust safeguards those assets and pass directly to your beneficiaries upon your death. Revocable trusts give you flexibility because you retain authority to amend or revoke them.

Is a Living Trust Liable or Subject to Probate?

A living trust holds assets that are managed by a trustee for intended beneficiaries. Also called a revocable trust, it differs from other trusts in that the trust creator, or grantor, can also serve as the trustee and can make changes to, or even revoke, the trust in its entirety during his lifetime. Living trusts are attractive because the grantor retains ultimate control over his assets while he is alive, but they are most commonly used to avoid probate.

LegalZoom. Legal help is here. Start Here. Wills. Trusts. Attorney help.

Related articles

How Long Must a Trust Be in Place to Avoid Inheritance Tax?

A trust is a method of protecting your assets from a complex and expensive trip through the probate courts, which have ...

What Are the Disadvantages of an Irrevocable Trust?

A trust is a legal device that permits a grantor to place assets under the control of a trustee, then who administers ...

What Is a Reversible Living Trust?

In order to shelter assets from the probate courts and taxation, many people choose to create a trust. In a trust, a ...

Difference Between Beneficiary Trust & Marital Trust

Trusts can provide a way for you to transfer your assets to your family while implementing safeguards to ensure the ...

Browse by category