If you have begun the estate planning process or even if you haven’t, you probably know that there are varying forms of trusts available to you based on your situation. However, you might not fully understand what each of these trusts do and how they differ from one another. Most of the information available to consumers is written in complicated legalese that only another lawyer can understand. On our blog and other published works, we strive to bring you clear and understandable explanations of Pennsylvania elder law.
In this article, we’re going to talk to you about irrevocable trusts.
First, let’s explain what a trust actually is. A trust is a legal document where an individual (the grantor) transfers ownership of certain assets, such as money or property. The assets are managed by a trustee. Any assets placed into the trust are considered property of the trust. Ownership of these assets will be transferred to a beneficiary at a time of the grantor’s choosing. Typically, ownership is transferred at the time of the grantor’s death but can be based on the age of the beneficiary. Additionally, some trusts stipulate that the assets be doled out in installments. Other trusts may allow for the ownership of all assets to be transferred at the same time.
Types of irrevocable trusts include:
- Charitable trusts
- Family and dynasty trusts
- Life insurance trusts
- Personal residence trusts
An irrevocable trust is, as it is aptly named, a trust that cannot be revoked. This means that once an irrevocable trust is filed, the grantor no longer has any rights to modify the document and has absolutely no ownership over the assets named in the trust.
This differs from revocable trusts, which can be modified and even dissolved by the grantor anytime before their death. Irrevocable trusts also differ from revocable trusts in that they offer several tax advantages.
These tax considerations are one of the prime reasons people set up irrevocable trusts. Because a person relinquishes ownership of the assets named in the irrevocable trust, those assets are no longer part of the grantor’s taxable estate. Not only that, but the grantor is no longer liable to pay taxes on the income generated by those assets. This may come as a surprise, but an irrevocable trust is actually considered it’s own tax entity with it’s own tax identification number. The taxes incurred by an irrevocable trust are managed by the trustee. Neither the grantor nor the beneficiary is responsible for taxes incurred by the irrevocable trust.
Irrevocable trusts also offer asset protection. Again, because the grantor no longer owns or receives benefits from assets named in an irrevocable trust, those assets cannot be seized by creditors. Likewise, these assets cannot be claimed by any creditors of the beneficiary. Remember, the assets remain property of the trust until the date upon which they are relinquished to the beneficiary.
As with a revocable trust, an irrevocable trust avoids the costly and time consuming process of probate. There is no need for a court to become involved with the estate when the division of assets has already been managed with a trust.
The benefits of an irrevocable trust can be very helpful but remember, these types of trusts cannot be changed. Be certain to choose your beneficiaries thoughtfully and carefully consider which assets to include in this type of trust. You are stuck with those decisions once the trust is finalized.
To learn whether or not an irrevocable trust should be a part of your estate planning process, please contact the Pittsburgh Elder Law Offices of Shields and Boris.