Last updated on October 31st, 2018
What Is An Irrevocable Trust?
An irrevocable trust is created when a trust’s grantor–it’s creator–cannot change or terminate the trust once it’s made. As a result, the trust’s grantor completely gives up all control of the assets and property in the trust.
Why Should I Make My Virginia Trust Irrevocable?
Should you choose this option, an irrevocable trust can go into effect either while you are living (a living irrevocable trust) or once you have passed away (a testamentary irrevocable trust). Once this happens, as mentioned above, it cannot be changed or terminated.
The main reason why people choose this option is to avoid or reduce estate taxes. Another key reason is so that people can protect their estate from being exploited or accessed wrongly in the future. We explain these two reasons more in depth below.
Irrevocable Trusts That Reduce Taxes
Grantor-Retained Interest Trusts
Grantor-Retained Interest Trusts reduce taxes because they eliminate property from an estate that’s taxable. Once you put property in the trust and name yourself as the trustee, you can retain interest from the property for the time period you set. This interest can be either income you generate from the trust or from it’s rights of usage. If you outlive the time period specified in the trust, the value of the property that remains cannot be counted towards estate taxes.
Life Insurance Trusts
Life Insurance Trusts reduces estate taxes by ensuring that proceeds from your life insurance are excluded from your taxable estate. The easiest way to do this is by making the trust the owner of your life insurance policy. Because of the change of ownership, the proceeds from the policy cannot be included in your estate taxes.
Generation-skipping trusts is an option in which you choose to transfer the assets in your estate to your grandchildren without it passing down to your children. It helps reduce estate taxes because while your grandchildren are final beneficiaries, they never own the property. As a result of this, the trust is not subject to estate taxes but rather, a generation-skipping transfer tax instead.
An charitable trust is a type of irrevocable trust in which you leave parts of your estate (gifts) to charity. If the charity is one that is tax exempt, you earn an income tax break. This means that the value of the trust is deductible from your income tax.
The creation of a Bypass Trust (B Trust) is mainly for spouses that would like to reduce their estate taxes. When one of the spouses dies, their property is put in the trust. While the surviving spouse has access to the trust, they never own it outright. Because of this, the property in the trust is not included in their estate when the surviving spouse passes away.
Irrevocable Trusts That Protect Property
Spendthrift Trusts give you the ability to give gifts or property to people who may not be fit to personally manage or use the money. At your bequest, the beneficiary of the trust cannot access the trust. Because it’s irrevocable, the controls that limit the beneficiary’s usage of the property cannot be changed.
Special Needs Trusts
A special needs trusts allows you to provide for someone with special needs or disability. With this option, the beneficiary of the trust also maintains their eligibility for government benefit programs. The trustee has the power to use the money or property for the beneficiary’s care.
By making the trust irrevocable, you erase the possibility that creditors may try to reach into those funds to pay off your debts. Also, because it’s irrevocable, you cannot access the trust for personal use, ultimately preserving the trust specifically for the beneficiary.
Creating an irrevocable trust is a multistep action that requires attentiveness and firm direction. Because you cannot change or terminate it, an irrevocable trust should only be made if you’re 100% sure of what you would like it to do.
Consider consulting an attorney to find out if an irrevocable trust is the right option for you.