Estate Planning: Irrevocable Trusts
Trusts are an important tool when it comes to estate planning and laying out how you want your assets to be distributed. When done properly, a trust can both shield your assets from excessive taxes after you die as well as save your family a great deal of trouble and additional stress by avoiding the probate process. Irrevocable trusts are a common estate planning tool for many people, but how do you know if it’s the right tool for your situation?
The Arizona estate planning lawyers at Brown & Hobkirk, PLLC are here to answer any questions you may have about irrevocable trusts and how they work. We have more than 20 years of experience developing smart estate planning strategies, giving us a thorough understanding of all the complexities involved in setting up an irrevocable trust.
When you choose Brown & Hobkirk, PLLC to handle your estate plan, you’ll work directly with one of our lawyers to design a plan that’s best for you and your family. Get your free case review today by calling one of our four Arizona offices, or fill out our online contact form.
What Is an Irrevocable Trust in Arizona?
A trust is simply a document or legal tool that allows an individual to place some or all assets under the control of a separate legal entity. The person who creates the trust is known as the grantor or trustor. The person who manages the assets of the trust is known as the trustee. The trustee must act according to the terms laid out by the grantor. The people to whom the trustee distributes the assets are known as the beneficiaries of the trust.
There are several reasons you might want to set up a trust. Trusts offer you more control over how your assets will be disbursed after your death. They may also allow your family to circumvent the probate process, saving them time, money, and stress.
In an irrevocable trust, the assets generally cannot be removed once ownership has been transferred to the trust. So it’s important to be extremely careful about when those assets are transferred and who gains control over those assets.
Revocable vs. Irrevocable Trusts
An irrevocable trust is one of the two broad categories of trusts. The difference between a revocable and an irrevocable trust is straightforward:
- A revocable trust can be modified while the grantor of the trust is still alive.
- Irrevocable trusts typically cannot be changed once the trust has been created. Some irrevocable trusts can be modified if the beneficiaries agree, but only if certain language is included in the trust when it’s initially set up.
Given how inflexible irrevocable trusts can be compared with revocable trusts, why would someone choose to create an irrevocable trust? There are a few different reasons, including:
- They lessen the tax burden on an estate. Irrevocable trusts offer much greater protection from estate taxes than revocable trusts. Depending on the size of your estate, the federal estate tax rate can be as high as 40 percent. This can severely limit how much of your assets will go to your family after you die. Irrevocable trusts are a helpful tool as part of a broader strategy to limit your family’s potential tax liability for your estate.
- They offer greater protection from creditors. Many of us leave behind some amount of debt when we die. Those debts can become a significant burden on surviving family members. Any assets placed in an irrevocable trust cannot be targeted by creditors, allowing you to pass more of your estate on to your family.
- They offer greater protection from lawsuits. If you work in a profession that makes you a target for lawsuits – if you’re a physician, for instance – placing your assets into an irrevocable trust means those assets cannot be seized through a legal claim.
Types of Irrevocable Trusts
Here are a few of the different types of irrevocable trusts you can create under Arizona law:
- Intentionally Defective Grantor Trust (IDGT) – In an intentionally defective grantor trust, certain assets are frozen for the purposes of calculating estate taxes but not for income taxes. The grantor of the trust pays the income taxes on any income generated from the trust, thus helping beneficiaries pay less in taxes later on.
- Irrevocable Life Insurance Trusts (ILIT) – An irrevocable life insurance trust is created solely to hold ownership of a life insurance policy, thus helping beneficiaries avoid paying estate taxes on the policy.
- Retirement Trust – In a retirement trust, the grantor transfers ownership of retirement accounts, such as a 401(k) or pension account. Transferring these assets to a trust can help beneficiaries avoid paying high estate taxes on the value of the accounts.
- Qualified Personal Residence Trust (QPRT) – A qualified personal residence trust lets you transfer ownership of a home into a trust. This lowers the value of your estate for the purpose of calculating estate taxes. A QPRT can be helpful if you have a piece of property you’d like to keep in your family for many years, but there are fairly complicated tax trade-offs.
- Qualified Domestic Trust (QDOT) – While most surviving spouses can reduce the estate tax burden on their partner’s assets by taking the marital exemption, this exemption does not apply if the surviving spouse is not a U.S. citizen. However, a qualified domestic trust allows surviving spouses to take the marital exemption even if they are not full U.S. citizens.
- Beneficiary Defective Inter-Vivos Trust (BDIT) – BDITs are similar to IDGTs in that certain assets are frozen for the purpose of calculating estate taxes but not for income taxes. Furthermore, because of how they’re set up, BDITs give the grantor of the trust a bit more control over the assets than in most irrevocable trusts. But the trust must be set up carefully, and the rules must be strictly adhered to. So be sure to speak to a lawyer if you’re interested in setting up a BDIT.
Talk to an Arizona Estate Planning Lawyer Today
If you are considering setting up an irrevocable trust to preserve your legacy and pass on your assets, speak to an Arizona estate planning lawyer today. Get a free consultation from a knowledgeable lawyer at Brown & Hobkirk, PLLC by calling one of our four Arizona offices or by contacting us online.