Using an Irrevocable Trust to Reduce Taxes

Most Recently Updated Sat. Dec. 9th, 2017: Using An Irrevocable Trust to Reduce Taxes.

From Our “Ask a Question” mailbag: “What can you tell me about Using an Irrevocable Trust to Reduce Taxes?”

Using an Irrevocable Trust to Reduce Taxes.

Using an Irrevocable Trust to Reduce Taxes.

New tax rules increase the exclusion amount used to give away assets without triggering any estate or gift taxes. This provides a unique opportunity. It is time to shift wealth out of your estate to provide asset protection and to reduce estate tax.

By using an irrevocable trust you provide protection from your children’s divorces, creditors and from the estate and inheritance taxes.  Not only are the assets protected during your children’s lives, but also when those same assets later pass to or in further trust for your grandchildren.

Basic Rule; Give Your Children Nothing. Use a Trust.

In short, DO NOT give assets directly to your children, which is then subject to creditors and divorce. Instead, have our Irrevocable Trust Lawyers form an irrevocable trust into which you make the gift. The trust now owns the asset. Your child received nothing.  But by using the correct language, the child can be both the beneficiary (the person who benefits from the broad language of the trust) and the trustee (the person who runs the trust). The key is that the trust owns the assets, not the child.

The Irrevocable Trust Protects Your Child.

Because the trust owns the assets, the child’s marital or creditor issues do not affect your gifted assets. We insert language that makes it clear that with few exceptions the child creditors cannot force the trustee to pay the child’s debts.  Further, the trust provides shelter from the assets being called marital assets during a divorce. Therefore, when the child dies the assets are not subject to estate or inheritance taxes as part of the child’s estate. The state and federal government tax your child’s assets. The child does not hold what the Trust owns.

This way the trust assets can pass to or in further trust for grandchildren without being reduced by these estate or inheritance taxes.

Irrevocable Trust Tax Advantages.

Another advantage of the irrevocable trust is that after the gift, the trustee is free to invest the assets using broad terms. The growth in value of the assets passes outside your estate, free of estate and inheritance tax.

For example, say you put $1 million into the trust and before you die ten years later that $1 million is invested and grows to $3 million. Therefore, the $2 million in growth passes outside your estate, free of the federal and state estate and inheritance tax.  Significantly, in this example, a Pennsylvania resident avoids the 4.5% Inheritance Tax on the entire $3M; a substantial saving.

Using an Irrevocable Trust to Reduce Taxes and Other Advantages.

Using your gift tax exemption in tandem with an irrevocable trust can be a powerful estate-planning tool. The calculations are complicated and the trust language precise, but when done well it can lead to significant savings when part of a proper overall estate plan.

If you need assistance with an estate plan or have questions about irrevocable trusts or gift tax planning, please call one of our probate lawyers or estate planning attorneys for a free consultation.

In this Post, I tried to answer the question, “What can you tell me about Using an Irrevocable Trust to Reduce Taxes?” So, let me know how I did, comments and questions are welcome!

If you still have questions, feel free to Contact our office for a free consultation. 

Author, Peter Klenk, Esq. LL.M.

Throughout our website, klenklaw.com, you may find more information about Estate Planning. Also, our firm focuses exclusively in the area of estate planning, probate, and the litigation surrounding estate planning and probate.  This includes Will Contests and Will Challenges. Therefore, if you need assistance with any estate related matter call one of our Experienced Estate Planning Lawyers for a free consultation. We practice throughout New Jersey, Pennsylvania, New York, and Florida.

Estate Planning Attorney, Peter L. Klenk