Irrevocable Trust

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What is an 'Irrevocable Trust'

An irrevocable trust can't be modified or terminated without the permission of the beneficiary. The grantor, having transferred assets into the trust, effectively removes all of his rights of ownership to the assets and the trust. This is the opposite of a revocable trust, which allows the grantor to modify the trust.

BREAKING DOWN 'Irrevocable Trust'

The main reason for setting up an irrevocable trust is for estate and tax considerations. The benefit of this type of trust for estate assets is that it removes all incidents of ownership, effectively removing the trust's assets from the grantor's taxable estate. The grantor is also relieved of the tax liability on the income generated by the assets. While the tax rules vary between jurisdictions, in most cases, the grantor can't receive these benefits if he is the trustee of the trust. The assets held in the trust can include, but are not limited to, a business, investment assets, cash and life insurance policies.

For more on Irrevocable trusts (and other types of trusts), check out How to Set up a Trust Fund or the Estate Planning Tutorial.

Irrevocable Trust Basics

An irrevocable trust has a grantor (the person who grants or gifts the assets), a trustee and a beneficiary. Once the grantor places an asset is inside an irrevocable trust, it is considered a gift to the trust and cannot be revoked. The grantor can dictate the terms, rules and uses of the trust assets with the consent of the trustee and the beneficiary.

Irrevocable trusts can have many applications in planning for the preservation and distribution of an estate, including:

• To take advantage of the estate tax exemption and remove taxable assets from the estate

• To prevent assets from being misused by beneficiaries; assets can be held in trust and distributed with conditions

• To be able to gift assets or remove them from the estate while still retaining the income from the assets

• To remove appreciable assets from the estate while still providing beneficiaries with a step-up basis in valuing the assets for tax purposes

• To gift a principal residence to children under more favorable tax rules

• To house a life insurance policy that would effectively remove the death proceeds from the estate

An irrevocable trust is a more complex legal arrangement than a revocable trust. Because there could be current income tax and future estate tax implications in the use of an irrevocable trust, seek the guidance of a tax or estate attorney.

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