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.

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.

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.

Protect your loved ones. Start My Estate Plan

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. Start My Estate Plan
How Long Must a Trust Be in Place to Avoid Inheritance Tax?

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.

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 the assets for the benefit of beneficiaries named by the grantor. A living trust is a trust created while the grantor is still alive -- as opposed to a testamentary trust, which is created by the terms of the grantor's will. A trust is irrevocable if the grantor cannot unilaterally revoke it.

A Living Trust Explained

A living trust is a legal device that establishes how your property is to be transferred upon death, but goes into effect during your lifetime. The grantor, who puts his property into the trust, assigns a trustee to administer the trust on behalf of a beneficiary. There are several types of living trusts. In comparison, a testamentary trust is created by the terms of a will and does not go into effect until death. Living trusts avoid probate but testamentary trusts do not.

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

Related articles

Family Trusts & Gifts

A family trust is an estate planning device used to transfer assets to family members without those assets having to go ...

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 ...

California Irrevocable Trust Laws

An irrevocable trust is an estate-planning tool designed for the long-term management of assets, which are permanently ...

Can an Irrevocable Trust Be a Grantor Trust?

An irrevocable trust can be part of a comprehensive tax reduction strategy. If the trust is not a grantor trust, the ...

Browse by category
Ready to Begin? GET STARTED