There are a number of irrevocable trusts.  All these trusts share two key characteristics:

  • Once established, they cannot be altered or canceled.
  • The grantor cannot also be both the trustee (who makes investment decisions) and the beneficiary (who receives the benefits from those investments).

The three most commonly used irrevocable trusts for your knowledge are:

  • Irrevocable income-only trusts (IIOT’s)
  • Irrevocable life insurance trusts (ILIT’s)
  • Generation-skipping trusts (GST’s)

Irrevocable Income-Only Trusts (IIOT’s) Irrevocable income-only trusts (IIOT’s) are trusts into which the grantor transfers assets on a permanent basis.  Once assets are in the trust, they cannot be removed, though the grantor can continue to receive the income that the trust generates.  When the grantor passes, the trust’s remaining assets go to the grantor’s named beneficiaries.  IIOT’s are most often used to:

  • Reduce assets subject to Medicaid eligibility limits
  • Plan for long-term care income needs
  • Shield assets from creditors
  • Ensure that funds are available for disabled dependents

Generation-Skipping Trusts (GST’s) Generation-skipping trusts are used to:

  • extend the unified credit amount for federal estate tax purposes
  • Allow remaining assets to pass to future generations
  • Provide income to your immediate heirs

With GST’s, your immediate heirs don’t own the assets placed into the GST – which means that no estate taxes are due upon your death.  Your immediate heirs get income from the assets in the trust, and when they pass, the assets go to your grandchildren.  The estate taxes are therefore deferred by a generation, allowing your assets to grow for decades without being deminished by estate tax.  This value of this opportunity is demonstrated by the Rule of 72.

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