Irrevocable trusts can be utilized in several different ways. Here’s what you need to know about them.
Today we’re joined by Jenny King for part two of our discussion on trusts. We talked about revocable trusts previously, so today we’re going to focus on irrevocable trusts.
A lot of clients come to us and say, “I need an irrevocable trust for asset protection or credit protection.” They’re usually referring to one of two types of creditors that they want to protect against. First, there are the “boogeyman” creditors like credit card companies or collection agencies. There are also “formerly friendly” creditors that could be a spouse of a child of yours or someone similar.
An irrevocable trust allows you to set up the terms for how the trust will operate. Usually, there’s a trustee that somewhat controls the spending. If it’s the credit card protection you want, a lot of times you’re trying to protect a spendthrift against themselves by putting someone you trust that is a little more financially conservative in that role.
You can set up the terms that will benefit future generations and cut out any spouses if need be.
When people are picking out trustees, a lot of people choose their accountants. Not as many choose financial advisors because there is a conflict of interest there. We see a lot of trusted family members, and of course, there are plenty of companies out there that can act as a corporate trustee.
One thing to remember is that being a trustee is a time commitment. Not only do you want to pick someone savvy, but you also want someone who can treat it as a full-time job, which it usually is at the beginning. They should be financially savvy, trustworthy, and have the time.
An irrevocable trust can also be used to avoid their capital gains taxes. In general, trusts are not necessarily going to be an income-tax saving strategy. They’re more useful for savings on estate taxes and gift taxes. The trusts do hit the highest tax bracket in 2019 at a sum of just $12,750. That’s not a lot of income to hit the highest tax bracket. You don’t want to be paying those 37% rates or 20% capital gains rates.
There is some state tax planning that can be done. For example, getting a trust set up in a state without income tax can allow it to grow up to 10% annually. You’ve got to get your tax planning done to do this right.
There are some instances where, if you’re going to own a life insurance policy and you want it out of your estate, you can create an irrevocable life insurance trust as a vehicle to do that.
How do people know if an irrevocable trust is right for them? The first thing you want to do is speak with your advisors. If you want privacy, trusts generally don’t have to go through probate. Also, if you want seamless administration, irrevocable trusts are good for that, too. It can also help with tax planning, especially if you’re worried about paying estate taxes when you pass.
Life insurance trusts are generally not considered part of your gross estate. If you’ve paid, for example, $200,000 in premiums over your life and have a $2 million policy, that difference has escaped estate taxation, which can be a huge deal for some.
If you need an irrevocable trust or have any questions, feel free to reach out to us via phone or email. We would love to hear from you.