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An irrevocable trust is a trust which cannot be changed or canceled once
it is set up without the consent of the beneficiary. Irrevocable trusts offer tax advantages
that revocable trusts don't, for example: An irrevocable trust enables a person to give money and
assets away even before he/she dies.
It is an arrangement in
which the grantor departs with ownership and control of property, and usually involves a gift of the property to the trust. The trust then stands as a
separate, taxable entity and pays tax on its accumulated income. Trusts typically
receive a deduction for income that is distributed on a current basis.
The use of irrevocable trusts in sophisticated tax planning involves a multitude
of complex tax rules.
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To avoid being taxed at higher rates, trust income can be reduced by
increasing distributions to beneficiaries, reducing the amount of taxable income
produced by the trust assets, or having the trust invest in assets that produce
capital gain rather than ordinary income.
Irrevocable trusts are useful in life insurance planning. For
instance, a properly structured irrevocable life insurance trust can
avoid probate costs and fees, and estate taxes on the insurance proceeds paid to
the trust upon the grantor's death.
Irrevocable trusts can also be useful in providing
children, especially those over age 14, with a fund for education or other
specific planning purposes. The trust is usually funded with "after-tax"
dollars through a gift.
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The annual gift tax exclusion, (an exclusion for gifts of
$12,000 or less per year per donee,) does not apply to gifts of a future interest,
(such as a gift to a trust,) so provisions must be
properly applied to make the gift a "present" interest. Drafting such clauses
requires expertise.
Types of non charitable Irrevocable Trusts Include:
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