irrevocable trustsTrusts can be among the most significant components of a physician’s financial and estate planning, but not everyone understands them or how they can affect a medical practice. A revocable living trust is a set of assets that you can add to or take away from while you are alive. Living trusts have several important distinctions compared to irrevocable trusts.
All trusts involve two main parties: the trustee (or trustees) and the trust beneficiaries. Trustees have the authority to use the assets in the trust. Beneficiaries are recipients of the benefits of the resources in the trust.

Roles of the Grantor

In a living trust, the grantor, or individual who created the trust can manage the trust by using assets or putting assets in. In an irrevocable trust, the grantor does not have this ability. That is, the grantor is not a trustee.
The grantor cannot take back the assets once the trust is created. One reason may be that the assets were distributed by the grantor during the grantor’s lifetime. Another may be that the grantor has died and the definition of “living trust,” in which the grantor was acting as a trustee, is no longer applicable.
If this is the case, a new trustee is named based on whom the grantor labeled as the successor during the trust’s creation. The trust document and trustees are now the sole controllers of the assets in the trust.

Functions of an Irrevocable Trust

An irrevocable trust is not subject to estate tax, since the grantor technically no longer owns the assets or has control over them. This fact allows for the application of the Irrevocable Life Insurance Trust (ILIT). Individuals who own estates and need to pay taxes on them at the time of death can use an ILIT as a place to own life insurance. Upon death, the insurance death benefit funds the trust and is not subject to estate or income tax. The trust documents and trustees govern this money.
In contrast, individuals would have needed to pay taxes on the life insurance if the insurance had been disseminated to the estate instead of the trust. Typically, only relatively wealthy families use an ILIT. It has a $5.2 million tax exemption, making it an excellent option for the very rich.
A more frequent use of an irrevocable trust occurs when a living trust is in effect upon the death of an individual. The grantor may have placed assets in the trust while living, or the will could fund the trust. At the time of death, the trust becomes irrevocable and is under the control of the trustee(s) and the trust document. It’s a good balance between control over and protection of assets.
An irrevocable living trust tends to supply more protection over assets than a revocable living trust, and it’s important to weigh all options when trying to select which type to establish. It’s typically advised to establish a trust with separate trustees, who must comply with the terms of the trust document, and beneficiaries.
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Last Updated on September 23, 2014