When irrevocable trusts are used, assets are transferred out of the trustmaker’s estate into the name of the trust. You, as the trustmaker, cannot alter, change, modify, or revoke this trust after execution. It’s irrevocable and you usually can’t be in control. However, trust protectors can modify your trust if your goals become frustrated.
Unlike revocable trusts, irrevocable trust assets have increased asset protection and are kept out of the reach of creditors. Taxes are often reduced because, in most cases, irrevocable trust assets are no longer part of your estate.
The experienced estate planning attorneys at Littleton Legal PLLC can help you figure out whether an irrevocable trust is a helpful tool for your personal situation. Call us today to set up a meeting. In the meantime, learn more about some popular forms of irrevocable trusts below.
As the name implies, an educational trust is a trust created to pay for loved ones’ education. Often parents, grandparents – or even aunts or uncles and friends – desire to create or continue an education legacy. In addition to legacy, other educational trust benefits are; tax minimization, asset organization, asset protection, peace of mind, privacy, flexibility, and family unity.
Education trusts can own a multitude of assets, including, but not limited to, life insurance and 529 plans:
- Life insurance is sometimes used to fund educational trusts, especially dynasty trusts which can continue for generations. If assets are to be used for tuition only and will be paid directly to the educational institution, there’s no need to allocate generation-skipping tax exemption. However, if funds can also be used for room, board, books, and travel, it typically makes sense to allocate both estate and generation-skipping tax exemptions when funding the trust. Life insurance is an effective way to leverage those valuable tax exemptions.
- Educational trusts can own 529 plans. Growth and distributions are income tax-free. Some state 529 plans offer asset protection, but if not, no need to worry because the educational trust offers asset protection in all states. This means assets can’t be seized in a lawsuit or other creditor attack.
The educational trust is essential should you become incapacitated and when you die. Those you name as successor trustees will follow the directions you provide in the trust document. They will manage the assets and make distributions on behalf of your beneficiaries as you would have done yourself. For example, trust assets are available to pay for your beneficiaries’ education, but not available for them to frivolously waste or to have seized in a lawsuit. And, court supervision is not necessary or required, so funds are not wasted and your personal family and financial matters are kept private.
If one trust is used, the educational trust provides flexibility to move assets between beneficiaries as needed. In the alternative, if multiple educational trusts are established, each beneficiary uses his/her special gift for his/her education.
If you have an education legacy you’d like to create or continue as well as children you love, Littleton Legal PLLC would be happy to discuss whether an education trust makes sense for you and your family.
Before you superfund UTMA and UGMA accounts, remember that those funds become your child’s at age 18 or 21, depending on state law. Imagine what you would have done with several hundred thousand dollars at age 21. For many, funds of that measure would likely have derailed your education and your life.
UTMA and UGMA are great for your children’s own money earned by babysitting, lifeguarding, or mowing lawns. They are not a great way to fund an education, get assets out of your estate, or lower income taxes. Instead, we encourage you to consider grandchildren’s trusts (or children’s trusts), which continue to be used quite successfully.
Here are the benefits of grandchildren’s trusts (or children’s trusts):
- You create a legacy for the beloved children in your life.
- You provide loving guidance so the assets aren’t squandered or used to fuel an addiction or party life.
- The assets you pass in trust can’t be seized in a lawsuit, car accident, medical crisis, bankruptcy, divorce, business failure, or the like.
- Assets are removed from your estate, so you eliminate applicable estate taxes.
- Assets can be kept in trust, yet benefit your grandchildren, for their entire lives.
- The trust can be dissolved if assets get spent down to pay for education, starting a business, traveling the world, or whatever you instruct.
Would you like to consider a trust for the beloved children in your life? Let’s talk about what that might look like and how it would work. It’s likely easier than you think. You’ll be happily surprised at your options and the legacy you can create. Contact Littleton Legal PLLC today.
An Irrevocable Life Insurance Trust (ILIT) is an irrevocable trust that applies for, owns, and maintains life insurance. It’s purpose is to get life insurance cash value and proceeds out of an estate for federal estate tax and generation-skipping tax purposes. Often, life insurance is purchased to equalize inheritances, provide an inheritance, fund tax bills, pay expenses, fund a buy-sell agreement, or benefit a charity. The ILIT does all that without increasing taxes and with little management.
Carefully crafted, the trust itself, as well as sub-trusts, can offer asset protection for trust assets so they can’t be seized in a divorce, lawsuit, bankruptcy, medical crisis, business failure, malpractice claim, and the like. In other words, assets are available to your beneficiaries but can’t be taken from them. You can even protect the assets against your beneficiaries themselves in the event they are spendthrifts, generally bad with money, or suffer from some form of addiction.
Sometimes, an ILIT is used as part of a more comprehensive estate plan, such as with a Charitable Remainder Trust (CRT), which provides an income stream to pay life insurance premiums. Though care is required, ILITs are relatively easy to setup and maintain. Contact Littleton Legal PLLC today to determine if an ILIT is beneficial for you.
Think about your home for a moment: you’ve paid significant income tax on the monies used to purchase your home – and – you’ve also paid a lot of real estate tax over the years. Then, when you want to pass your home to your loved ones, you have to pay tax yet again.
We understand that frustration and, fortunately, we’re really good at showing our clients how to minimize – and, sometimes, eliminate the tax hit. For homes, we use the qualified personal residence trust (QPRT).
Here are the main qualified personal residence trust benefits:
- You get the value of your home – and all future appreciation of value – out of your estate without paying federal estate or generation-skipping taxes.
- During the term of the trust, you maintain control of your home, can live in the home, can sell your home and buy another one, and you get the benefit of all tax benefits such as deductions for real estate taxes paid.
- The $250,000/$500,000 exclusion of capital gain is still available to you.
- After the initial trust term, you can be granted the right to rent the residence for the balance of your lifetime for its fair rental value. Paying rent on your home may feel odd, but it’s another way to get more assets out of your estate without paying transfer taxes.
Littleton Legal PLLC uses qualified personal residence trusts for our high net worth clients. If you find the qualified personal residence trust benefits intriguing, let’s talk and determine whether a QPRT should be part of your estate plan.
Imagine structuring a gift so that it provides for your family for generations. Imagine creating a plan that ensures that every one of your heirs will always have the money to get a proper education, start a business, or pursue their dream. That’s the power of a dynasty trust.
Here are the main characteristics of a dynasty trust:
- Dynasty trusts are irrevocable trusts sited in a state that either has abolished the rule against perpetuities or has a very long allowance under the rule. You do not need to be a resident of a state to benefit from their rule against perpetuities law.
- Dynasty trusts are often funded with life insurance to leverage the federal estate and generation-skipping taxes. Other assets can be used as well.
- Dynasty trusts pass assets from generation to generation without subjection to transfer taxes. Trust assets stay intact.
- Dynasty trust assets are protected from creditor seizure, so a beneficiary’s divorce, bankruptcy, medical crisis, car accident, malpractice suit, business failure, or other liability will not diminish trust assets.
- Dynasty trusts can be customized with your instructions so assets are used as you think best. In fact, you can protect assets from your beneficiaries spendthrift or addictive behaviors.
Littleton Legal PLLC commonly uses dynasty trusts for our high net worth clients. If you find dynasty trust benefits intriguing, let’s talk about it and determine whether a dynasty trust should be part of your estate plan.
High net worth families or those in high-risk professions such as real estate developers, business owners, and professionals such as doctors and lawyers are often intrigued by the Family Bank Trust (FBT). The FBT offers both asset protection and access.
Here’s how the family bank trust works:
- A spouse transfers assets into a trust for the benefit of her spouse and/or children.
- These beneficiaries have access to trust funds for their needs: health, education, maintenance, and support.
- The spouse who made the transfer (“grantor spouse”) pays the income taxes on the trust funds, thereby providing an additional non-taxable gift.
Here are the benefits of the family bank trust:
- The beneficiaries’ creditors such as divorcing spouses, bankruptcy trustees, lawsuit creditors, and the like have no access to the funds. (Asset protection.)
- The grantor spouse’s creditors cannot seize trust funds. (Asset protection.)
- Federal estate and generation-skipping taxes are eliminated on all assets transferred into the trust and paid in income taxes on trust funds. Trust assets will not be taxed in either the estate of the grantor spouse or the beneficiaries. (Tax avoidance.)
Here are some additional opportunities the family bank trust allows:
- If the estate is significant or both spouses participate in high-risk professions, each spouse can set up an FBT for the other, thus providing asset protection and eliminating federal transfer taxes on about $11 million.
- The FBT can be used as a retirement trust.
- The FBT is an irrevocable trust, yet, if carefully crafted, trust protectors can make sure your goals are carried out even if the law or circumstances change – without court interference.
You may have also heard the names “bypass trust,” “lifetime bypass trust,” or “spousal trust” to describe the family bank trust. They are one and the same. If they sound intriguing to you, come in for a meeting with the experienced estate planning attorneys at Littleton Legal PLLC to get the details on how the family bank trust would work for you and protect your family.
Who needs a Grantor Retained Annuity Trust? Strong Grantor Retained Annuity Trust (GRAT) candidates:
- Have assets that are expected to rapidly grow in value or that can be discounted for transfer tax purposes.
- Have an estate around the federal tax exemption.
- Wish to transfer assets to loved ones.
Authorized by the federal tax code, the GRAT allows you to make gifts to a trust in exchange for a payment stream for a specified number of years. The goal is to transfer property during your lifetime without incurring the wrath of the gift tax.
- You transfer property which you expect to rapidly appreciate into the trust, making a gift to your beneficiaries. Property that can be discounted for transfer purposes works especially well.
- Gift tax can be as low as zero because the remainder interest for beneficiaries is deemed to have no value based upon calculations of the value of the contribution to the trust plus annuity payments made over a term of years.
- Because you will be the grantor for tax purposes, you will pay taxes owed by the trust. The income stream will provide cash flow to pay taxes.
- If you outlive the trust term, all GRAT assets are officially out of your estate and, therefore, not subject to the federal transfer taxes. If you don’t, the assets are brought back into your estate.
- At the end of the trust term, all assets are transferred to your beneficiaries without incurring transfer tax.
If it sounds as though a Grantor Retained Annuity Trust, may be a good fit for you, let’s chat about it. Littleton Legal PLLC welcomes your questions at GRATs or any other estate planning tool.
We absolutely love revocable living trusts (RLT) and recommend most of our clients include an RLT in their estate plans. One of our favorite RLT benefits is the ability to pass assets to loved ones in asset protection trusts; these are trusts that can’t be seized in the event of a lawsuit, divorce, bankruptcy, medical crisis, business failure, and the like. But while you can use an RLT to provide asset protection for loved ones, you can’t use it to create asset protection for yourself. That’s why we use domestic asset protection trusts (DAPT).
Here are the benefits of a domestic asset protection trust:
- The DAPT – domestic asset protection trust – provides asset protections for your own assets. It’s a trust you set up to benefit yourself, yet keep your creditors out.
- You benefit from asset protection laws within the United States and don’t need to move assets offshore.
- While an independent trustee must have sole discretion in distributing assets, you can remove and replace the trustee with another independent trustee.
- You retain the power to pass assets to loved ones at your death.
- We can design the trust to be an incomplete gift and keep it part of your estate, yet outside the reach of creditors. Or, in the alternative, your loved ones can be the primary beneficiaries and you can receive funds at the discretion of your trustee, if needed.
- You do not need to be a resident of a state to site your trust in that state; thus, you can use asset protection laws of a state without uprooting your life.
DAPTs are not all peaches and cream. Like all asset protection planning, they cannot be used to defraud current creditors. They must be carefully drafted, funded, and administered. If you think a domestic asset protection trust may be a good fit for you, contact Littleton Legal PLLC to explore your options.