Revocable and irrevocable trusts have many similarities. Both types of trusts provide for the transfer of trust property to a trustee who administers and distributes the property as governed by the trust document.
A trust is revocable by the settlor or settlors unless expressly made irrevocable by the trust instrument. Most revocable trusts become irrevocable on the death of the settlor or cosettlor.
Irrevocable trusts involve a relinquishment of control or enjoyment by the settlor and have a gift and other tax consequences. On the other hand, a revocable trust usually does not have such substantive tax effects because it may be revoked by the settlor at any time. Moreover, so long as the trust is revocable, the settlor’s creditors are able to attach the assets of the trust.
What Are the Different types of Irrevocable Trusts?
- Trusts for Minors
Trusts for minors are specialized forms of permanent trusts that more narrowly focus on the specialized circumstances and requirements of minors.
- Special Needs Trusts
The primary purpose of a special needs trust is to preserve and supplement government benefits for a disabled or aged beneficiary.
- Life Insurance Trusts (ILIT)
An irrevocable life insurance trust is typically used to remove the proceeds of life insurance form the insured’s gross estate, while making the proceeds available as a source of liquid funds.
- Charitable Trusts.
A charitable remainder trust is designed to provide benefits to named individuals for a specified period of time, with the remainder interest passing to charity. A charitable lead trust is designed to provide benefits to a charity for a specified period of time, with the remainder interests passing to individuals.
- Qualified Domestic Trust (QDOT)
Generally, no estate tax deduction is allowed for transfers to a surviving spouse who is not a citizen of the United States. A variation of the marital deduction can be obtained if the transferred property is put in a qualified domestic trust (QDOT).
- Estate Balancing Trusts
If one member of a married couple is wealthy and the other has a few assets, an inter vivos qualified terminable interest property (QTIP) trust can be used to provide the less wealthy spouse with a taxable estate, thereby making it possible to take advantage of that spouse’s unified credit on his or her death.
- Permanent Trusts.
The permanent trust is designed for the management of irrevocably transferred assets. The trust objectives include immediate removal of the transferred property from the settlor’s estate for estate tax purposes (at the price of making an immediate gift for gift tax purposes). The trust terms are also designed to ensure that the taxable income form the trust corpus will no longer be includable in the settlor’s taxable income for income tax purposes, although irrevocable trusts are sometimes drafted intentionally to cause the trust income to be taxed to the grantor (intentionally defective grantor trust).
- Grantor Retained Interest Trusts or Grantor Retained Annuity Trusts
A grantor retained interest, or annuity, trust allows the settor to retain an interest, or annuity, in trust assets for a limited period of time, with the remainder interest passing to another person. These trusts are designed to minimize taxes by incurring a gift tax only for the remainder interest that follows the settlor’s retained interest.
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