Revocable Vs. Irrevocable
Generally, family trusts are created while the creator is alive. As a result, the creator has the choice to make the trust either revocable or irrevocable. A revocable trust allows the creator of the trust to change the terms of the trust at any time. He can also terminate the trust and retake the property. The creator of an irrevocable trust cannot do that; once he donates the property, he cannot change the terms of the trust or regain the property. Despite the lack of control, a trust creator may make the trust irrevocable to protect the donated property from creditors, secure Medicaid benefits, or avoid estate taxes on the property.
A qualified terminable interest property trust -- QTIP -- allows a person to leave property to his spouse in a trust. It is created when one spouse dies. The trust property is used by the living spouse for the rest of her life. When the surviving spouse dies, the property in the trust is distributed based on the terms established by the first deceased spouse. By organizing a QTIP, any estate tax on the trust property is deferred until the surviving spouse dies. These sorts of trusts are particularly popular when a person is in a second marriage and wants to leave his property to his children from the first marriage. QTIPs can be complicated to create, so consider hiring a licensed attorney to help you draft the relevant trust documents.
The gift tax is a federal levy on the transfer of any property where the transferring individual receives less than the full value for the property. The transferring party is responsible for paying the gift tax. Gifts to spouses are not taxed. The annual exclusion allows you to give a certain amount of property to any individual without incurring a tax. As of March 2012, the annual exclusion amount is $13,000. So if John gives Sally and Jerry $13,000 each, he would not have to pay any gift tax. Property that is donated to an irrevocable trust is subject to gift taxes, while property donated to a revocable trust is not.
Often, the property in a trust generates income. This income must be taxed as it is earned. Who pays taxes on that income depends on the type of trust. If the trust is revocable, the creator of the trust pays the tax on the income. If the trust is irrevocable, the beneficiaries of the trust pay the tax.