Trusts Attorney in Phoenix, Arizona
Why would someone create an irrevocable trust?
Why would someone create an irrevocable trust?
More In This Category
View Transcript
Irrevocable trusts are almost always used in connection with some income or estate tax purpose. The most common form of an irrevocable trust is a life insurance trust commonly called ILITs. And that’s a technique that we use for people to transfer money to an irrevocable trust where they lose control of the money at a very low cost. And then in the instance of life insurance premiums and so, you get the premiums out of your estate and then when you die and the policy pays off it’s inside that protected structure and it’s not counted against your estate. There’s other types of irrevocable trusts, GRATs, and charitable trusts and different things like that but almost always irrevocable trusts have to do with estate or income tax savings. You don’t use irrevocable trust very often or I should say properly to give money to your kids, for instance, unless you want to lose control. The most common problem with irrevocable trusts is the person that gives the money to the trust 15 years later says oh, I’ve got a million dollars’ worth of cash value in that insurance policy that’s inside the trust, I’d like to get that back. Well, you can’t get it back. You gave it up and the deal that you made with the government is you gave up control over the money in exchange for it not being includable in your estate. And I could start citing a bunch of Internal Revenue code but that would just bore everybody to death.
Contact Mark A. Bregman
Email This Lawyer
(602) 254-6008
See All This Lawyer's Videos
Visit Lawyer's Website
Phoenix, AZ estate planning attorney Mark A. Bregman explains the intentions behind why someone would want to create an irrevocable trust. He points out that irrevocable trusts are almost always established for income or estate tax purposes. The most common form is the Irrevocable Life Insurance Trust (ILIT), which allows individuals to transfer money into a trust, relinquishing control over those assets at minimal cost. This structure is particularly useful for life insurance: premiums are removed from the grantor’s estate, and when the policy pays out, the proceeds remain within the trust and are not counted as part of the estate.
He notes that other types of irrevocable trusts include Grantor Retained Annuity Trusts (GRATs), charitable trusts, and similar vehicles, but the primary purpose of most irrevocable trusts is tax savings. He cautions that irrevocable trusts are not typically used to transfer wealth to children unless the grantor is willing to relinquish control. A common issue arises when a grantor later regrets giving up control, such as wanting access to cash value in a life insurance policy held within the trust. Once assets are transferred, they cannot be reclaimed, as the grantor has agreed to surrender control in exchange for the tax benefits.
He emphasizes that the rules governing irrevocable trusts are complex, but the key takeaway is that they provide powerful estate planning and tax benefits when used appropriately.
