Examples:

• • John created a revocable trust but later amended beneficiaries.
  • The irrevocable life insurance trust Emma formed cannot be revoked.
  • Upon Mark’s death, his revocable trust assets were subject to estate taxes.
  • Irrevocable trust protected Sophia’s assets from creditors in bankruptcy.
  • Income from Xavier’s revocable trust flowed through to his personal tax return.

How to Proceed:

• • Evaluate estate planning goals and desire for ongoing control and flexibility.
  • Assess comfort with current asset protection measures.
  • Weigh income and estate tax objectives when structuring trusts.
  • Consider hybrid approaches like an irrevocable trust owning a revocable one.
  • Consult estate attorneys and CPAs to model potential structuring impacts.

FAQs:

• • Can I change beneficiaries of an irrevocable trust? Not without court/beneficiary approval, with limited exceptions.
  • Who pays tax on revocable trust income? The grantor does, as a disregarded passthrough entity.
  • Does a revocable trust avoid probate? Yes, that is a key benefit over a standard will.
  • What assets are best for irrevocable trusts? Life insurance, appreciating assets, LLC interests.
  • Is a revocable or irrevocable trust better? It depends on specific goals and situation. Consult experts.

Examples:

• • Both of Barbara’s trusts avoided lengthy public probate after she passed.
  • Henry’s revocable living trust lets him easily amend terms as dynamics change.
  • The Smith family shielded assets from son’s creditors using an irrevocable trust.
  • An irrevocable life insurance trust reduced estate taxes owed on death proceeds.
  • A Medicaid Asset Protection Trust helped the Garcias qualify for long-term care.

How to Proceed:

• • Use revocable trusts for flexibility if creditor risk or tax exposure is low.
  • Consider irrevocable trusts to lock in asset protection and estate exclusion.
  • Assess Medicaid qualification rules when funding an irrevocable trust.
  • Name trusted parties willing to manage irrevocable trusts long-term.
  • Coordinate pour-over wills with any revocable trust structures.

FAQs:

• • How much can you put in a revocable trust? No limits, but may create an over-funded trust.
  • What assets should not be put in a revocable trust? Qualified plans, health savings accounts, certain stock options.
  • How long do irrevocable trusts last? Depends – some span generations, others are shorter-term.
  • Do revocable trusts protect assets from a nursing home? No, consider a Medicaid trust instead.
  • Can trustees change terms of an irrevocable trust? Only through a court process in most cases.

Examples:

• • The Millers used an intentionally defective grantor trust for income tax efficiency.
  • A complex nongrantor trust hit the maximum tax bracket on just $13,450 of income.
  • A credit shelter trust preserved both spouse’s lifetime gift and estate tax exclusions.
  • The Thompson’s trust paid state taxes in its legal resident jurisdiction, not the grantor’s.
  • GST tax exemptions were allocated to a dynasty trust to span multiple generations.

How to Proceed:

• • Evaluate grantor vs nongrantor status for irrevocable trust income tax efficiency.
  • Model income tax exposure based on projected trust earnings.
  • Assess trust structures that optimize both spouses’ transfer tax exclusions.
  • Align trust legal situs with tax-efficient jurisdictions.
  • File gift tax returns allocating GST exemption to multi-generational trusts.

FAQs:

• • What is the income tax rate for irrevocable trusts? Hits 37% at just $13,450 for 2022.
  • Do revocable trusts file tax returns? Not separately, unless elected after becoming irrevocable.
  • What is the downside of irrevocable trusts? Loss of control and flexibility, plus high income tax rates.
  • Do beneficiaries pay taxes on irrevocable trust distributions? Depends on distributable net income status.
  • How much can you gift to an irrevocable trust? $12.06M per individual for 2022, $24.12M per couple.

Examples:

• • An irrevocable trust protected John’s assets when his business was sued.
  • A spendthrift clause prevented trust depletion when beneficiary Betty had credit issues.
  • The court invalidated a transfer into Tom’s trust as a fraudulent attempt to avoid debts.
  • Revocable trust assets remained vulnerable to hospital creditors after Debbie’s death.
  • Offshore trusts in the Caymans added a layer of protection for the Williams family holdings.

How to Proceed:

• • Use irrevocable trusts for maximum creditor protection, revocable for more modest defense.
  • Include spendthrift language in both trust types as an added safeguard.
  • Avoid transfers to trusts if litigation, bankruptcy or divorce are imminent or likely.
  • Consider tilting asset mix toward irrevocable trusts later in life as estate exposure grows.
  • Evaluate the added protection and administrative complexity of offshore trust jurisdictions.

FAQs:

• • Will a revocable trust protect assets from a lawsuit? Limited protection vs irrevocable trusts.
  • What power does a trustee have over an irrevocable trust? Manages assets but can’t easily change terms.
  • Can creditors go after assets in an irrevocable trust? Very difficult unless transfer was fraudulent.
  • How long does a trust need to be in place to protect assets? Ideally funded before issues arise, 2+ years.
  • What type of trust protects assets from divorce? Irrevocable trusts if funded prior to marriage.

• • • 1. Which type of trust can generally be modified after being established? A) Revocable B) Irrevocable C) Both D) Neither
    • 2. Revocable trusts become irrevocable when the grantor does what? A) Moves states B) Amends the trust document C) Dies D) Files a final tax return
    • 3. Which trust type generally offers more creditor protection? A) Revocable B) Irrevocable C) Testamentary D) Totten
    • 4. Assets in which type of trust are still included in the grantor’s taxable estate? A) Revocable B) Irrevocable C) Both D) Neither
    • 5. Which trust acts as a separate taxpayer for income tax purposes? A) Revocable B) Irrevocable nongrantor trust C) Both D) Neither
    • 6. What key estate planning goal is shared by both revocable and irrevocable trusts? A) Avoiding probate B) Eliminating estate taxes C) Qualifying for Medicaid D) Obtaining a tax deduction
    • 7. Which trust type allows the grantor to retain control over assets and terms during their life? A) Revocable B) Irrevocable C) Both D) Neither
    • 8. An intentionally defective grantor trust is what type of irrevocable trust? A) Nongrantor B) Complex C) Grantor D) Simplified
    • 9. Irrevocable trust income tax rates reach the maximum 37% at what income level for 2022? A) $10,275 B) $13,450 C) $41,775 D) $539,900
    • 10. Which type of irrevocable trust is sometimes used for Medicaid planning? A) Charitable remainder B) Grantor retained annuity C) Medicaid asset protection (MAPT) D) Qualified personal residence (QPRT)
    • 11. Revocable trusts are disregarded entities for what type of taxes during life? A) Gift B) Estate C) Income D) All of the above
    • 12. Which trust type is sometimes used to own life insurance policies for estate tax efficiency? A) Revocable B) Irrevocable life insurance trust (ILIT) C) Qualified terminable interest property (QTIP) D) Grantor retained income trust (GRIT)
    • 13. Irrevocable trusts can sometimes be modified through what court process? A) Decanting B) Reformation C) Division D) All of the above
    • 14. Assets transfers to a trust may be invalid if deemed what? A) An incomplete gift B) Constructive receipt C) A fraudulent conveyance D) A step transaction
    • 15. What common clause can limit imprudent trust distributions in either trust type? A) Crummey power B) Ascertainable standard C) Spendthrift provision D) Trust protector
    • 16. Which trust option enables multi-generational estate tax efficiency? A) Revocable B) Irrevocable C) Generation-skipping D) Both B and C
    • 17. What is the main downside of an irrevocable trust for the grantor? A) Higher income taxes B) Loss of control and flexibility C) Difficult to establish D) Public disclosure
    • 18. What annual tax filing do nongrantor irrevocable trusts make? A) Form 706 B) Form 709 C) Form 1041 D) Form 1099
    • 19. Which document often works in conjunction with a revocable trust? A) Durable power of attorney B) Pour-over will C) Living will D) All of the above
    • 20. What is the main reason to consider an offshore asset protection trust? A) Investment diversification B) Favorable tax treatment C) Confidentiality D) Enforceability barriers and flight clauses
  • Answers:
    • • • 1. A) Revocable
        • 2. C) Dies
        • 3. B) Irrevocable
        • 4. A) Revocable
        • 5. B) Irrevocable nongrantor trust
        • 6. A) Avoiding probate
        • 7. A) Revocable
        • 8. C) Grantor
        • 9. B) $13,450
        • 10. C) Medicaid asset protection (MAPT)
        • 11. D) All of the above
        • 12. B) Irrevocable life insurance trust (ILIT)
        • 13. D) All of the above
        • 14. C) A fraudulent conveyance
        • 15. C) Spendthrift provision
        • 16. D) Both B and C
        • 17. B) Loss of control and flexibility
        • 18. C) Form 1041
        • 19. D) All of the above
        • 20. D) Enforceability barriers and flight clauses

Disclaimer

The trust and estate planning information provided in this article is intended for general educational purposes only and should not be construed as formal legal, tax or financial advice, nor does it create any professional advisory relationship. While we make every effort to present accurate and current information, specific nuances and considerations unique to individual circumstances may not be fully addressed. Estate planning laws and tax regulations can vary by jurisdiction and are subject to change, so some of the content may not be relevant or applicable to your situation. We strongly encourage you to consult directly with qualified estate planning attorneys, tax professionals and financial advisors licensed in your state who can provide personalized guidance tailored to your specific needs and objectives, as well as advise on the most up-to-date strategies and requirements for your location and situation when establishing and administering trusts or engaging in the estate planning process.