Different Types of Irrevocable Trusts
There are many different types of irrevocable trusts with their own unique characteristics and purposes. Some common types of irrevocable trusts include:
Life Insurance Trust
Life insurance is usually purchased for an individual, but if the life insurance is owned by an irrevocable trust, you may be able to avoid the heavy taxes that usually follow a death when the insurance benefits are added to the estate. Life insurance trusts remove life insurance proceeds from the grantor’s probate and taxable estate. A life insurance irrevocable trust is owned by the trust, so the benefits do not accrue to the estate. This will allow the beneficiary to collect more of the life insurance benefits. To receive this favorable tax treatment, the trust must be in existence for at least three years before the grantor’s death and the grantor cannot have any control over the life insurance policy.
Special Needs Trust
If you have a child with special needs, then you may wish to place assets in an irrevocable trust to ensure that your child is provided for in the event of your death. In a special needs trust, you select a trustee who will oversee the dispersal of funds for the care and benefit of your child with special needs. These trusts are built so that your loved one can still continue to receive public benefits to which they are entitled while also receiving a higher quality of life through your contributions.
Charitable Irrevocable Trust
Grantors can also create what is known as a charitable trust. In a charitable trust, the grantor receives a stream of income from the trust during their lifetime. When they pass away, the rest of the funds go to a charity of the grantor’s choosing. The grantor also becomes eligible for an income tax charitable deduction when they fund the trust based on the amount that will be donated to charity. A charitable trust is a nice way for a grantor to avoid probate court and donate their remaining assets to a cause they care about. You also benefit from a reduction in estate and income taxes due to your charitable contribution.
Spendthrift Irrevocable Trust
Spendthrift trusts let you protect gifts you provide to beneficiaries who may have difficulty managing money. Your trustee gives your chosen beneficiaries property according to the terms of your trust. Because the beneficiary cannot access trust property on their own, the trust property is protected from creditors until your beneficiary receives an allotment. You can also provide payments to third parties, such as your child’s school or doctor.
Grantor-Retained Interest Trust
This special type of trust allows you as the grantor to retain some interest in the trust for a certain period of time. You also name final beneficiaries for the property you put in the trust. This trust can help you remove property from your estate, thereby reducing your estate tax liability.
Bypass Trust
This trust is sometimes used by wealthy couples to reduce their estate tax. After the first spouse passes away, most of their property goes into the trust. The surviving spouse can use trust property but does not directly own it, thereby reducing the second spouse’s eventual probate estate.
For any of the trusts described above, It is imperative to select a trustworthy trustee because it is particularly difficult to change the trustee once the irrevocable trust has been established and funded. It’s also important to be extremely cautious with the language that establishes and defines the operation of the trust because that too can rarely be modified.
The Advantages of Setting Up an Irrevocable Trust
One of the main advantages of setting up an irrevocable trust is to allow a grantor’s family members to avoid the unnecessary hassle of probate court. All wills must be probated, which is a public and often time-consuming and expensive process. Also, the will could be challenged, and disputes may arise. Legal proceedings could drag on, causing a delay in the dispersal of the decedent’s assets. In contrast, trusts are privately administered.
Some of the most commonly cited advantages of setting up an irrevocable trust include:
- Avoid probate court
- Protect assets for beneficiaries, including spouses, children, and other family members
- Avoid estate taxes
- Provide for management of assets in the event that the grantor becomes incapacitated
- Plan for Medicaid needs in the future
Contact a New York Irrevocable Trust Lawyer Today
You might consider setting up an irrevocable trust in order to protect your assets for your spouse and family members, to avoid probate court and hefty taxes, and to attain peace of mind that your assets will be protected for your surviving family members. If these are your goals, contact an irrevocable trust lawyer at Chaves Perlowitz Luftig LLP. We have the knowledge and resources to guide you through the process of setting up an irrevocable trust and can help you ensure that your assets and property are preserved for your loved ones. Contact us today for a free consultation. We can explain how to set up an irrevocable trust and how an irrevocable trust works.
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