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The execution of a trust agreement brings into existence a separate legal entity, the trust. The trust is managed and administered by a trustee for the benefit of beneficiaries. Usually the assets of the trust are provided by the grantor who created the trust.
An irrevocable trust is a trust that may not be altered or amended after it has been executed. Thus, once implemented, an irrevocable trust is impossible to change, though the assets of the trust may be increased or diminished. This means that the names and the interests of beneficiaries may not be altered; however, future transfers of additional assets to the trust could be increased substantially, or decreased to zero.
There are several benefits and uses for irrevocable trusts as part of an estate plan. Among the benefits are:
- A separate taxable entity is created. Thus, properly prepared and properly implemented, an irrevocable trust can be used to remove assets from a person's taxable estate, and thus to reduce estate taxes.
- Since an irrevocable trust is a separate taxable entity, it gets the benefit of its own set of graduated rates, and can manipulate its tax liability by making distribution of all or a part of the taxable income of the trust to beneficiaries.
- An irrevocable trust is usually a spendthrift trust which means the rights of creditors to gain access to the income and principal to which a beneficiary may be entitled, or to which the grantor once owned, are substantially limited.
- In addition, there are many uses for irrevocable trusts. Common uses include: A life insurance trust to hold life insurance policies. Such a trust may remove the insurance policies from the estate of the insured.
- A liquidity trust, often funded by life insurance, to provide liquidity in the form of loans or as a purchaser of assets from an estate that is otherwise ill-liquid, such as an estate comprised primarily of real estate.
- A gift trust to act as the receptacle for gifts to persons who you do not wish to enjoy the gift outright. The gifts may reduce the size of your estate, and the amount of estate tax that must be paid.
- A domestic relations trust to fund all or a part of a person's obligation under a divorce decree or premarital agreement. Once funded, there is some more certainty that the assets will be there to satisfy the obligations.
- A settlement trust can be used as a part of a settlement of tort or contract obligations in a manner which is mutually beneficial to the creator of the trust and the recipient of the payments.
An irrevocable trust provides maximum flexibility for the distribution of the income and principal of an irrevocable trust. All or part of the income, or a specified dollar amount, may be distributed. The amount may be paid to one or more beneficiaries for their life, for a period of years, or before or after attaining a certain age. There may be serial beneficiaries; for example, first to a spouse, then to children, then after that to grandchildren. Similarly, the principal may be distributed at such times and in such amounts as the grantor may determine.