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What is an irrevocable trust and what are its tax advantages?
When you create a trust, you decide whether the trust will be revocable or irrevocable. A revocable trust can be changed or even dissolved by you at any time.An irrevocable trust, however, can never be changed. The assets you put into it must stay there. Beneficiaries cannot be added or deleted. And the only way to change the trustee is for that person to die or agree to resign.
Why then would you choose to make your trust irrevocable? For tax advantages. An irrevocable trust or the beneficiary of the trust pays the income taxes on what its assets earn. When you die, the trust property is not part of your estate and is not subject to estate taxes (assuming your estate is big enough). Conversely, revocable trusts offer no tax benefits at all.
If you want flexibility, make your trust revocable. But if you need tax breaks, you may want to forgo flexibility and form an irrevocable trust instead.What is Crummey demand power and how does it affect gift taxes?
Crummey demand power is an important tool in planning gift taxes. This power permits all transfers to a trust to qualify for the $12,000 gift tax exclusion in 2008 and $13,000 in 2009 even if the trust benefits are delayed into the future.
The term "Crummey" comes from D. Clifford Crummey, whose court case resulted in the approval of the demand right technique.Is the transfer of property into a trust subject to gift tax?
Gifts that are transferred into a trust may be subject to gift taxes. You can make an unlimited number of tax-free gifts per year, as long as gifts are not more than $12,000 to each person or entity per year in 2008 ($24,000 if a couple makes the gift). The limit rises to $13,000 in 2009. Gifts can be made to trusts and to charities, as well as to individuals. You must file a gift tax return if the amount transferred into a trust exceeds the annual limit. Fortunately, you generally do not pay gift taxes until you die, and then only if your total gifts plus your estate are over $2 million for 2008 or over $3.5 million in 2009. In 2010, there is no federal estate tax. However, it is scheduled to be reinstated with a $1 million limit in 2011.How can I calculate my tax deduction from creating a charitable remainder trust?
Your tax deduction is affected by the value of the trust assets, your annual income from the trust and how long you will receive it. The IRS publishes tables for the calculations. Remember that there are limits on tax deductions for charitable gifts, and the Alternative Minimum Tax may apply if your gift involves appreciated property. You can get more information from Publication 5227. But, frankly, this is a complex part of tax law. So, seek the help of a tax professional when you are planning a trust.Will my beneficiaries have to pay estate taxes or go through probate if I set up a living trust?
A revocable living trust allows you to "self-probate" your assets while you are alive and competent. The funding or retitling component of the revocable living trust process allows you, as the trust maker, to transfer your assets into your trust and consequently avoid the probate process.
Whether forming a trust will reduce your estate taxes will largely depend on the type of living trust that you choose to create. If you form a revocable living trust, you can move assets in and out of the trust anytime you wish, but you will not reduce your taxes. If you choose an irrevocable trust, the assets you put in the trust will have to stay there, but the trust may provide you with tax advantages.
Remember, though, estate taxes do not come into play in 2008 unless the estate is worth more than $2 million. This amount rises to $3.5 million for 2009.So, before you go through the expense of setting up a living trust, talk to an experienced estate-planner.How can transferring my group life insurance policy to an irrevocable life insurance trust help me avoid estate taxes?
If you have a group life insurance policy through your employer, placing a policy in an irrevocable life insurance trust can keep the proceeds out of your estate when you die and thus avoid estate tax. In this transfer, all your rights under the group policy are given to your irrevocable trust. This includes your ownership rights, and your right to change beneficiaries or convert the policy to a permanent form of insurance. The transfer should be documented and forwarded to the insurance company. Your insurance company may have a form for this purpose, or you can use a lawyer. The insurance company reissues any identification documentation in the name of the irrevocable trust.
Not all group policies automatically allow assignment of employees’ rights, but you can ask for a waiver.Of course, estate taxes are only an issue if you have an estate that might be subject to estate taxes -- worth more than $2 million in 2008 or $3.5 million in 2009. In 2010, there is no federal estate tax. After that, the tax is reinstated for estates worth more than $1 million.Return to Questions
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