Tax Benefits of Irrevocable Trusts

Using irrevocable trusts in your estate planning can offer several potential tax benefits for the person that creates the trust (also known as the “grantor”), depending on how the trust is structured and funded. Here are a few examples:

Estate Tax Planning

Irrevocable trusts can be an effective tool for reducing the size of your taxable estate, potentially saving your beneficiaries from paying estate taxes. Once assets are transferred into an irrevocable trust, they are no longer considered part of your estate, and therefore, are not subject to estate taxes upon your death. Additionally, if the trust is structured properly, any appreciation in the value of the assets held by the trust can also be excluded from your estate for tax purposes.

Gift Tax Planning

When you transfer assets into an irrevocable trust, you are making a gift to the trust beneficiaries. However, if the gift is structured properly, it may be exempt from gift taxes. For example, you may be able to use your annual gift tax exclusion ($16,000 in 2023) to make tax-free gifts to the trust beneficiaries. Additionally, if the trust is structured as a grantor trust, you can continue to pay income taxes on the trust’s income, which effectively allows you to make additional tax-free gifts to the trust beneficiaries.

Generation-Skipping Transfer Tax Planning

Irrevocable trusts can also be used to avoid the generation-skipping transfer tax (“GSTT”), which is a tax that is imposed on transfers of assets to grandchildren or other beneficiaries who are more than one generation younger than the grantor. By creating an irrevocable trust and naming grandchildren as beneficiaries, you can potentially avoid the GSTT.

Income Tax Planning

Depending on how the trust is structured, irrevocable trusts may be able to generate income that is taxed at a lower rate than the grantor’s personal income tax rate. Additionally, if the trust is structured properly, income can be shifted to beneficiaries who are in a lower tax bracket, potentially reducing the overall tax liability.

It’s important to note that the tax implications of creating an irrevocable trust can be complex, and it’s generally recommended that you work with an experienced attorney and tax professional to ensure that your trust is structured properly and meets your specific needs and goals. Additionally, it’s important to carefully consider the implications of giving up control over the assets in the trust, as irrevocable trusts are, by definition, not able to be changed or revoked once they are created.

Please feel free to contact Burrell Law, P.C. to discuss if you have any questions!