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Irrevocable trust is a money term you need to understand. Here’s what it means.
What is an irrevocable trust?
An irrevocable trust is a type of trust that cannot be canceled or changed after it is finalized without permission of the beneficiary.
An irrevocable trust is simply a kind of trust that cannot be changed or canceled after the document has been signed. This sets it apart from a revocable trust, which can be altered or terminated and only becomes irrevocable when the trust maker, or grantor, dies.
When a grantor sets up an irrevocable trust, he gives up control of the assets placed in the trust. This creates a completely separate tax entity because the trust isn’t managed or controlled by the grantor, and it’s not yet controlled by the heirs or beneficiaries.
The trust pays its own taxes, and it’s typically managed by a trustee. Moreover, the grantor cannot modify or revoke the trust, without the consent of the beneficiaries or the trustee.
Typically, irrevocable trusts are used to reduce or avoid estate taxes. They also are used to meet other goals, such as to protect assets from being wasted or misused or to protect assets of an individual with a disability.
Irrevocable trust example
Assuming John Smith has $10 million and he transfers $5 million in cash to the irrevocable trust.
He goes on a spending spree, and then the stock market suddenly plummets, which is where he makes most of his money. He wants to retrieve the $5 million that he put in his irrevocable trust because he’s broke and badly needs the money.
Unfortunately, he is no longer the owner of the assets. It’s owned by the trust and will be distributed to his children when he dies.
You can save a lot on estate taxes and still have an irrevocable trust with enough flexibility to meet your changing goals. Learn more about estate taxes and planning today.
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