An irrevocable living trust is a powerful tax & estate planning tool. It can protect the assets placed in trust from future creditors, divorce, and Medicaid. It can also function as a will substitute, allowing your family members to avoid probate. But what is it? This article will tell you what an irrevocable living trust is, how it differs from a revocable trust, and what it’s benefits and disadvantages are.
What is an Irrevocable Living Trust?
An irrevocable trust is a trust which is not revocable by the settlor (person who set up the trust AKA trustor/grantor). A living trust simply means a trust made while the settlor is alive. Thus, an irrevocable living trust is an irrevocable trust setup while the grantor is still alive.
Unlike a revocable trust, an irrevocable trust does not allow for the settlor to be the trustee, settlor, & primary beneficiary. If the settlor retained the power to unilaterally withdraw the trust corpus, the trust is not irrevocable. The trust is irrevocable because the terms of the trust do not allow the grantor to withdraw the trust assets unilaterally.
How to Set Up an Irrevocable Living Trust in Phoenix, Arizona?
The steps to setting up an irrevocable living trust in Phoenix, Arizona are similar to those required to set up a revocable trust. However, greater care needs to be taken in identifying some key persons. Namely, the trustee and the restrictions on who may serve as trustee and what powers they may have.
Because the trust is not revocable and will have permanent tax consequences, it is imperative to engage the services of an estate planning attorney or law firm who thoroughly understands the estate planning and tax consequences. Every lawyer who practices trusts & estates can set up a reasonable revocable trust. However, only a small subsection of the trusts & estates bar spends the time to learn and stay up to date with all of the tax consequences.
Once a competent lawyer is engaged, he or she will go over the options and come up with a plan which makes the most sense for your situation. Once the initial trustee is chosen, the lawyer drafts the document and then you execute the document which outlines the terms of the trust. After execution, you then fund the trust by transferring assets to the trustee.
Advantages of an Irrevocable Living Trust in Phoenix, Arizona
There are several advantages to establishing an irrevocable trust. Below are some of the benefits.
- Asset protection from future creditors
- Protection from an equitable split in case of divorce
- Reduce or eliminate estate tax liability
- Reduce or eliminate generation skipping transfer tax liability
- Protecting assets from Medicaid (ALTCS)
- Avoiding probate for family members
- Allows for a trusted person to manage assets in case you’re incapacitated and/or in a nursing home
Trustee’s Duties in Phoenix, Arizona
The trustee’s duties in an irrevocable trust vs a revocable trust are the same. The only difference is that the trust cannot be revoked and so the grantor is held to a higher standard when it comes to self dealing and for the most part is disallowed from engaging in any at all.
As the name suggests, an irrevocable trust is a fiduciary arrangement in which the grantor gives up control of the assets placed in the trust. The trustee is responsible for managing and safeguarding the assets for the benefit of the beneficiaries, according to the terms of the trust document. Such management includes making investment decisions, distributing income and principal to the beneficiaries according to the terms of trust, filing tax returns, keeping accurate records, and monitoring the portfolio’s performance.
As a fiduciary, the trustee is obligated to act in the best interests of the beneficiaries and exercise a high level of care, prudence, and loyalty in carrying out their duties. As such, the role of trustee in an irrevocable trust is crucial in ensuring that the grantor’s strategy & wishes are effectuated and the beneficiaries’ interests are protected. Please contact a knowledgeable irrevocable trust lawyer such as ourselves for more information on how to select a trustee for your irrevocable trust.
What Happens to an Irrevocable Living Trust When the Settlor Dies in Phoenix, Arizona?
Contrary to what you might think, upon the settlor’s death, the irrevocable living trust just continues operating as the settlor instructed (this is in contrast with a revocable living trust which becomes irrevocable and usually distributes the assets to the beneficiaries of the trust). The only impact the settlor’s death may have on the functioning of the trust is if the settlor retained an active part in the management of the trust or served as a trust protector. In which case, the only impact would be their unavailability and subsequent replacement by their successor in office.
Tax Benefits of Establishing an Irrevocable Living Trust
Establishing an irrevocable trust like a SLAT has estate and gift tax advantages. By transferring the assets while alive, the donor locks in today’s valuation (the future growth is not taxed) and current unified exemption credit. As I write this, the current exemption is nearly 13 million, but is set to halve in 2026 (adjusted for inflation).
In addition to getting future growth out of the estate, the grantor can obtain valuation discounts for assets transferred to the trust, further reducing the impact of the estate and gift tax. Finally, by establishing an irrevocable trust in a state with no income tax, the trust is able to avoid Arizona’s state income tax on any income generated by the trust assets. Talk to a knowledgeable trust lawyer such as ourselves to learn more about avoiding these taxes and deferring other taxes.
Types of Irrevocable Living Trusts
There are various types of Irrevocable Living Trusts available, and it’s crucial to understand which one best suits your needs. Our attorneys in Phoenix, Arizona have extensive experience dealing with all forms of Irrevocable Trusts, including:
- Irrevocable Life Insurance Trusts (ILITs): If you own a life insurance policy on your own life, it’s important to be aware that the proceeds from the policy will be included in your taxable estate at death. However, creating an ILIT and transferring ownership of the policy to the trust can help remove the life insurance proceeds from your estate and reduce estate taxes.
- Third-Party Special Needs Trusts: Parents with a disabled child may unintentionally disqualify their child from government benefits by accumulating savings in the wrong type of account or investment. A third-party special needs trust, also known as a supplemental needs trust, allows you to leave assets to your disabled beneficiary while preserving their public benefits and enhancing their quality of life.
- Charitable Remainder Trusts: This type of trust generally has two beneficiaries – the person who creates the trust (and possibly their spouse), and a qualified charity or tax-exempt organization. During the trustor’s lifetime, they receive a fixed percentage of income from the trust. Upon death, the charity receives the remainder of the trust.
- Generation-Skipping Trusts: These trusts, also known as dynasty trusts, are a useful planning tool to protect assets from generation to generation. Assets are locked up in the trust to be transferred to the grantor’s grandchildren, while skipping their children. They are sometimes used to reduce estate taxes while protecting assets as they appreciate in value.
Understanding the different types of Irrevocable Trusts available in Phoenix, Arizona can help you choose the one that aligns with your specific estate planning goals. Our attorneys can guide you through the process and help you establish the right trust for you and your family.
What Assets Should I Transfer to an Irrevocable Living Trust in Phoenix, Arizona?
Just like a revocable trust, you can transfer assets of nearly any kind into an irrevocable trust. However, because you cannot revoke an irrevocable trust, choosing which assets to transfer is a crucial task. Getting good legal advice from an estate planning lawyer to help you decide which assets are ideal for the type of trust you created is always recommended.
But to help give you some ideas on how to get started and what questions to ask, below are some of the types of assets usually transferred into an irrevocable trust and the types of trusts they’re typically associated with. Please keep in mind that this list is hardly exhaustive and is for demonstrative purposes only.
- The family home – Qualified Personal Residence Trust, Medicaid Protection Trust
- Commercial & residential real estate, business interests, stocks & bonds, other appreciating assets – GRIT, GRAT, a lifetime estate tax exemption trust (one flavor of which is the spousal lifetime access trust)
- Low basis assets such as stocks & bonds – charitable trusts
- Life insurance policies – Irrevocable life insurance trust
- Cash and other liquid assets – Crummey or minor’s trust
Can an Irrevocable Living Trust Be Changed After It Has Been Established in Phoenix, Arizona?
As its name suggests, once the transfer of assets is complete, the irrevocable trust is typically irrevocable; which means that it can’t be changed. However, if the trust document or state law allows for modifications or decanting, then a modification of some of the trust provisions may be accomplished. Seek out the advice of an irrevocable trust attorney for further information.
In conclusion, an irrevocable living trust can be a valuable tool for tax and estate planning in Phoenix, Arizona. It offers various advantages such as asset protection from future creditors, reducing federal estate tax liability, avoiding probate, and more. If you’re considering establishing an irrevocable trust or have questions about how it can benefit you, it’s important to seek the advice of a knowledgeable estate planning attorney. Contact us today for help in setting up an irrevocable trust that suits your specific needs and circumstances.