How Is an Irrevocable Living Trust Used in Estate Planning?


Quick Answer

An irrevocable living trust is used in estate planning to reduce the amount of an estate subject to estate taxes by transferring ownership of assets to the trust, reports Bankrate. Different types of irrevocable trusts exist to meet specific estate situations, according to CNN Money.

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How Is an Irrevocable Living Trust Used in Estate Planning?
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Full Answer

Assets in irrevocable living trusts are safe from federal and state estate taxes because the assets are owned by the trust and not the person who set up the trust, states Bankrate. Although creators of irrevocable trusts cannot revoke them once they are set up, some flexibility concerning the beneficiaries and assets can be built into them. The creator of the trust can stipulate the time, amount, manner and standards of asset distribution.

Credit shelter trusts, also known as bypass trusts, enable couples to transfer assets to a trust upon the death of the first spouse, states CNN Money. The assets remain tax-free; the surviving spouse and future beneficiaries can use the assets but do not own them. Generation-skipping trusts are set up to provide tax-free support to grandchildren as beneficiaries. Qualified terminal interest property trusts enable a surviving spouse to derive income from a trust's assets, and the balance of the trust's assets are distributed to beneficiaries when the surviving spouse dies. Life insurance trusts transfer ownership of life insurance policies to a trust, from which it is distributed to beneficiaries on the death of the policy holder.

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