This article will explain irrevocable trusts and their application to Illinois estate planning.
What is a Trust?
A trust is a legal entity that can own property separate from its creator, known as the grantor. The trustee named in the trust is responsible for managing the assets owned by the trust for the benefit of the beneficiaries named in the trust. The trustee is obligated to manage and distribute the assets a trust owns according to the terms laid out in the trust by the grantor. To learn more about trusts generally, check out our article: Illinois Trusts Explained.
What is the Definition of an Irrevocable Trust?
Trusts come in two general flavors: revocable living trusts and irrevocable trusts. Revocable trusts can be modified or revoked by the grantor at any time. The grantor of a revocable trust typically retains complete control over the assets in the trust. The benefits of a revocable living trust typically occur after the grantor passes. These include providing for managing and distributing assets to beneficiaries and ensuring that a probate case is not necessary to distribute a grantor’s assets.
When a grantor creates and transfers assets to an irrevocable trust, on the other hand, they permanently give up at least some control over the asset. The trust cannot be revoked or modified once it is created. Assets transferred to an irrevocable trust are no longer considered to be owned by the grantor. Still, they are owned by the trust for the benefit of the beneficiaries.
For more on this, check out our article: What is the Difference Between Revocable Living Trusts and Irrevocable Trusts?
What Are Irrevocable Trusts Used For?
Because irrevocable trusts take away at least some of the grantor’s rights in the property owned by the trust and grant property rights to the trust’s beneficiaries, they can be used for the following purposes that revocable trusts cannot accomplish:
- Protecting assets from creditors (learn more: How to Protect Assets From Creditors);
- Removing assets from the grantor’s estate for the estate tax while still allowing the grantor to retain some control over the assets (learn more: Irrevocable Trusts, Estate Tax and Gift Tax);
- Transferring assets to particular types of irrevocable trusts known as Grantor Retained Annuity Trusts, Grantor Retained Income Trusts, and Grantor Retained Unitrusts allow the assets in the trust to accumulate in value over time without the accumulated value being counted as part of the grantor’s or state and without the transfer to the beneficiary being subject to gift tax (learn more: GRITS, GRATS, and GRUTS explained); and
- Removing the death benefit of a life insurance policy from the grantor’s taxable estate; (Learn more: Irrevocable Life Insurance Trusts Explained).
To learn more about estate tax planning, check out our article: How to Avoid Estate Taxes.
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