One of the primary goals of estate planning is to preserve the value of your estate—ensuring that the assets you leave behind retain their full value as they are passed down to your beneficiaries. A key component of this is tax planning. Simply put, you don’t want your estate to be whittled away by taxes. You want your heirs to receive as much value as possible—and strategic tax planning makes that possible.
One salient issue is irrevocable trust taxes. In this post, we’ll take a look at irrevocable trust taxation, explaining how this issue factors into your estate planning.
What Is an Irrevocable Trust?
Essentially, this term denotes a trust that cannot be modified or amended without the permission of the beneficiaries. For instance, if you set up an irrevocable trust for your adult daughter, you cannot change the terms of the trust without her permission. Legally, the assets have transferred to her, and you have given up the rights of ownership over those assets. (Basically, this is just the opposite of a revocable trust, where the grantor can make changes as needed.)
What Are the Main Irrevocable Trust Advantages?
There are a few potential benefits to establishing an irrevocable trust—and most of them have to do with taxation.
One of the primary irrevocable trust advantages is that, when you place assets into the trust, you no longer own them—meaning they are no longer part of your taxable estate.
In other words, one of the reasons to consider an irrevocable trust is that it can ease the estate tax burden and potentially preserve the value of your estate.
What About Income Tax?
The problem you may run into when filling out an irrevocable trust tax return is that, while estate taxes are lowered, the income tax can be quite high. In fact, the income generated from your irrevocable trust is often taxed at a higher rate than your personal income tax rate.
There are some workarounds to this, however, such as “grantor-trust” rules and also the granting of certain restricted powers of appointment to beneficiaries. These strategies can mitigate the irrevocable trust tax burden, which means that an irrevocable trust can be a good option to maintaining the value of your estate. However, this is only true when your trust is set up and managed correctly.
Working with an Irrevocable Trust Attorney
When you work with an estate planning attorney, you can ensure the right tax strategies. Additionally, a lawyer can guide you through the following issues:
- How to choose a revocable trust vs. an irrevocable trust.
- Selecting the right irrevocable trust trustee.
- Preparing your irrevocable trust tax return.
- Ensuring proper trust administration to keep your assets out of probate.
These are complicated issues that make it necessary to work with an irrevocable trust lawyer to keep your estate planning focused and efficient.
Contact Singh Law Firm to Ask About Trusts
At Singh Law Firm, our job is helping clients choose the right estate planning strategies and resources, and then implementing them correctly. In many instances, this means setting up irrevocable trusts, then taking the right tax planning measures.
If you have further questions about the potential tax advantages or disadvantages of an irrevocable trust or are ready to establish a trust for your own estate plan, we invite you to reach out to us.
Contact us today to schedule an appointment with Singh Law Firm, and talk to one of our attorneys about preserving the value of your estate.