Why Should You Use an Irrevocable Trust?
By Seth Maynard
A trust is a relationship in which assets or properties are held by one person for another. One kind of trust is a pure trust. It is a contract between private persons. Protected by the constitution, laws cannot contravene on people’s rights to enter into contracts. A pure trust is useful as it is upheld anywhere in the country, it is not dependent on statutory law and it is always valid.
An irrevocable trust is one in which the details cannot be changed or revoked. These, if desired, can only be done with the force of a court order. The grantor of property is liable for less tax than when the trust is of the revocable variety. Moreover, this type of trust provides estate tax savings and protection from those whom you owe.
There are different types of irrevocable trusts. A Charitable Remainder Trust is one in which the principal is eventually turned over to a charity. This occurs after a per-appointed time period. In the meantime, the beneficiaries receive the income made from the principal. The benefits: no capital gains tax, an income tax deduction, and a reduction of estate taxes as the asset no longer remains a part of the grantor’s estate. There are even sub types of this kind of trust: a charitable remainder annuity trust, a charitable remainder uni trust, and a charitable pooled income fund. The first sub type makes yearly fixed payments. The second makes yearly payments which are based on a fixed proportion of the trust’s value. A pooled income fund allows contributions from multiple sources, hence the term “pooled”.
A Charitable Lead Trust works in the opposite way. The principal returns to the beneficiaries while the earnings are turned over to the charity. The principal is surrendered after a particular duration. A Family Trust allows married people to increase the amount they can save from estate taxes by up to two times. A Generation-Skipping Trust or Dynasty Trust is a very long-term thinking version. It enables grants to family members two generations removed from the one giving the funds. These are usually the grantor’s grandchildren.
As there are obvious benefits to setting up irrevocable trusts, Mike Ioane created an entire chapter devoted to this topic in his book “Boston Tea Party”. It also includes a full ready- to-use copy of an actual trust agreement, covering all aspects of such a legal document. The chapter describes how to use the document and explains the basic terminology.