Irrevocable Trusts

An irrevocable trust is primarily designed for asset protection and tax minimization. Once assets are transferred into the trust, they are removed from your taxable estate, effectively shielding them from creditors, lawsuits, and estate taxes.

The main difference lies in control and flexibility. A revocable trust can be altered or cancelled by you at any time, but offers no creditor protection. An irrevocable trust cannot be easily changed once established, but it provides significant protection against creditors and estate taxes because the assets are no longer legally yours.

Because you legally transfer ownership of the assets to the trust, they are no longer considered part of your personal property. Therefore, if you face a lawsuit, bankruptcy, or divorce, creditors generally cannot seize assets held within the trust (provided you have not retained a beneficial interest in the trust or the transfer is deemed voidable, as Arizona law limits protection for ‘self-settled’ trusts) to satisfy your personal debts.

These trusts can significantly reduce your estate tax liability by removing appreciating assets from your estate. However, this often means sacrificing the ‘step-up in basis,’ potentially increasing capital gains taxes for heirs, so careful analysis is required. Additionally, specific types of irrevocable trusts can shift income tax burdens to beneficiaries in lower tax brackets or allow for tax-free growth of assets for future generations.

You can fund an irrevocable trust with a wide variety of assets, including cash, investment portfolios, real estate, life insurance policies, and interests in family businesses or LLCs.

A Dynasty Trust is a type of irrevocable trust designed to pass wealth from generation to generation without incurring transfer taxes (such as estate, gift, or generation-skipping transfer taxes) at each generational level. It allows your wealth to compound for the benefit of your descendants (up to 500 years under current Arizona law).

A GRAT is a financial instrument used to minimize taxes on large financial gifts to family members. It allows you to freeze the value of an asset for estate tax purposes while transferring any appreciation on that asset to your heirs with little to no gift tax cost.

A QPRT allows you to transfer your primary or vacation home into an irrevocable trust while retaining the right to live in it for a set number of years. This reduces the value of the gift for tax purposes and removes the property’s value from your taxable estate. It should be noted that these trusts are highly sensitive to the §7520 rate and do not make sense in a high rate environment.

The primary disadvantage is the loss of control; once you move assets into the trust, you cannot take them back or easily change the terms. Additionally, income generated by the trust may be taxed at higher trust tax rates if not distributed to beneficiaries and they will lose the ‘step-up in basis’ that would have occurred upon your death.

Choosing a trustee involves finding someone who is financially literate, trustworthy, and impartial. While family members can serve, it is often wise to appoint a professional fiduciary or a corporate trustee to ensure the trust is managed strictly according to its terms and state laws.

While generally permanent, modern estate planning laws sometimes allow for modifications through methods like “decanting” (moving assets to a new trust with better terms) or utilizing a “Trust Protector” who has limited powers to update the trust due to changes in the law.

Yes, but it requires careful timing. Assets placed in a properly structured irrevocable trust generally do not count as available resources for Medicaid eligibility, provided the transfer is made outside of the five-year “look-back” period.

Yes. Because the trust owns the assets, not you, they bypass the probate process entirely. This ensures a faster, more private distribution of assets to your beneficiaries upon your passing.

Transfers to an irrevocable trust are typically considered taxable gifts. However, you can utilize your lifetime gift tax exemption to cover these transfers, avoiding immediate out-of-pocket taxes while reducing the size of your taxable estate.

The process involves three main steps: consulting with our attorneys to determine your goals, drafting and signing the trust document to establish the legal entity, and “funding” the trust by formally transferring titles of your assets from your name to the trust.