Irrevocable trusts can cover a wide range of issues. They are typically used in more sophisticated estate, gift and generation-skipping-transfer-tax (“GST”) techniques. Estate planning attorneys love acronyms, and we went a little overboard with acronyms for irrevocable trusts. Some of the common acronyms you will see are ILIT, QPRT, IDGT, CRAT, CRUT, CLAT, CLUT, GRAT, GRUT, QTIP, and QSST. We explain the most common irrevocable trust below.
The Spousal Lifetime Access Trust (“SLAT”) is becoming increasingly popular as way to take advantage of the large gift and estate tax exemptions under current federal law. In a SLAT one spouse creates a trust for the other spouse. The trust is structured so that any gift to the trust is a taxable gift which will use the donor spouse’s gift and estate tax exemption. If structured properly, the assets held in the SLAT, including any appreciation in assets held in the SLAT, will not be included in either spouse’s taxable estate upon their death.
The most common irrevocable trust is the irrevocable life insurance trust (“ILIT”). The ILIT will own life insurance and if properly structured, none of that life insurance will be includable in your gross estate for estate and GST tax purposes. This could be an effective way to transfer tax-free millions to your beneficiaries.
Another common irrevocable trust is the grantor retained annuity trust (“GRAT”). In a GRAT, the person who creates the trust, the grantor, is paid an annuity from the trust for some period of time. Whatever is left goes to the remainder beneficiaries of the GRAT. This is a very powerful strategy for passing wealth to successive generations in an extremely tax-efficient manner.
Another popular form of an irrevocable trust is the charitable remainder trust (“CRT”). In a CRT you normally contribute a highly appreciated asset to the trust. The trust then sells it and reinvests the proceeds into income-producing assets. You receive income for life and when you die it goes to the charity that you designated.
Benefits of a CRT:
- Produces income for life
- You’ll receive a current charitable tax deduction
- No taxes when the asset is sold
- You normally would receive more income than if you sold the asset yourself
- A charity that’s important to you benefits
- The value of the asset could be more than replaced if you use some of the income to buy life insurance through an ILIT
We can also do your QPRT too. Ask us what this acronym means!
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