Do you know what an irrevocable trust is? This is a trust that cannot be amended or altered. The assets conveyed to an irrevocable trust cannot be withdrawn or returned to the grantor or settlor. An irrevocable trust is normally created for estate tax purposes. A person will transfer assets to an irrevocable trust to avoid having to include the fair market value of these assets in his or her taxable estate at death. It is important to remember that a transfer of an asset to an irrevocable trust constitutes a gift. Accordingly, the fair market value of the asset on the date of the transfer to the trust must be reported to the Internal Revenue Service as a gift by April 15 after the year of the transfer. The taxpayer’s estate or gift tax unified credit will be applied to the gift taxes due as a result of this transfer. The advantage of transferring assets to an irrevocable trust is that the appreciation in the value of these assets will not be subject to federal estate taxes upon the taxpayer’s death.
Another use of the irrevocable trust is for the purchase of life insurance to provide the beneficiaries of the trust with the money to pay the estate taxes of the grantor or settlor. Since the life insurance policy is owned by the trustee and not the taxpayer, the proceeds paid on the taxpayer’s death are not included in his or her gross estate. The payment of the premium for the life insurance during the taxpayer’s life is normally made from annual contributions by the taxpayer to the trustee of the irrevocable trust. Since there is presently a $15,000 per donee annual exclusion for federal gift tax purposes, there is no gift tax owed when these annual contributions to the irrevocable trust are made if the beneficiaries of the trust are granted the unrestricted right to withdraw these contributions during the year in which they are paid to the trustee. The withdrawal right for each beneficiary is usually limited to the amount of the annual gift tax exclusion, which is presently $15,000 per donee.
The proceeds of an existing life insurance policy transferred to an irrevocable trust will be included in the estate of the grantor or settlor if he or she fails to survive for three years after the date of the transfer. Also, there is a gift tax on the value of the life insurance policy on the date of the transfer to the irrevocable trust.
If avoiding probate on the distribution of an asset after death is a goal, there are methods other than a trust. Bank accounts can be distributed to others without a living trust or a probate proceeding through the creation of join bank accounts with the right of survivorship. However, there is the possibility of a withdrawal of funds by a joint owner without the knowledge and consent of the owner of the account. Do not wait to learn more about Irrevocable Trusts from our law firm. You can contact us to schedule a meeting with attorney Gregory Gay.