Irrevocable Trusts

Irrevocable trusts are important and useful tools for estate planning.  An irrevocable trust is a financial arrangement in which the grantor relinquishes ownership and control of some property, assets or other funds and transfers them to the trust. An irrevocable trust cannot be revoked, modified, or terminated by the grantor once created; and, once transferred into the trust, the grantor surrenders rights to those funds or assets.  These transfers to the trusts are considered gifts.

Irrevocable trusts offer many tax advantages. An irrevocable trust permits the grantor to donate assets and other property to be held by the trust for the benefit of named beneficiaries.  The transfers can be made during the grantor’s life in order to take advantage of gift tax benefits, and such transfers can be structured so that they are income tax advantageous as well.  The beneficiaries are entitled to the trust property when and if needed, and the grantor can govern how and when any distributions are made when creating the trust agreement. The trust is a separate entity which may produce income based on the assets it holds.  Depending on the type of trust, it may be considered a separate taxpayer and may owe taxes on any accumulated income or holdings. An irrevocable trust generally receives a deduction from income that is regularly disbursed to the beneficiaries, and the beneficiaries will then be responsible for the income taxes related to that income.

Two of the most common irrevocable trusts are 1) those designed to hold life insurance policies outside of an individual’s estate (often referred to as an Irrevocable Life Insurance Trust, or ILIT) and 2) those designed to remove property from an individual’s estate for later distribution to a charity (often referred to as a CRT, CRAT or CRUT).

1)              Irrevocable Life Insurance Trust (ILIT):  Here a donor transfers existing life insurance policies, subject to a 3-year transfer rule, or authorizes the trustee to purchase life insurance and hold it in the name of the trust (or trustee).  By having the trust own the insurance policy, the policy amount will not be included in the grantor’s taxable estate upon his or her death.  If designed properly, this type of irrevocable trust may also be used to hold other assets.  Donations made to the trust can be withdrawn by the beneficiaries, subject to the annual exclusion, and the donations, if rejected, can be used to pay the insurance premiums.  Upon the death of the insured, the proceeds of the policy can be distributed to the beneficiaries or used to purchase assets from the estate of the insured and thereby providing cash to be used by the estate.

2)              A Charitable Remainder Trust (either a Unitrust or an Annuity Trust) is used to hold cash and/or property where the donor receives an annuity payment from the trust either for a specific term or for life.  Upon the death of the donor, the remainder interest in the property passes to the charity specified by the donor.

There are numerous types of irrevocable trusts to fit a client’s specific needs.  Give us a call to discuss whether an Irrevocable Trust is right for your situation.

 

For more information regarding estate planning, business law or tax controversy and compliance, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com or call us at 404-255-7400.

 

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose.  The information contained herein is provided “as is” for general guidance on matters of interest only.  Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services.  Before making any decision or taking any action, you should consult a competent professional advisor.

Charitable Deductions Gone Awry

Charitable deductions can be confusing and mistakes can be expensive. Recently, a California couple found this out the hard way. On May 29, 2012, a case from the U.S. Tax Court denied the couple an $18.5 million charitable deduction because of a technicality on the deduction form. The couple donated a valuable piece of real estate to charity, but did not follow the Commissioner’s exact directions on how to document the deduction. Josef Mohamed is a real-estate broker and a certified real-estate appraiser, so he believed he knew how to properly set up a charitable remainder trust and file the tax returns himself. Mr. Mohamed even went so far as to intentionally under value the property by nearly $2 million to minimize the risk of claiming too large a deduction. Unfortunately, Mr. Mohamed did not read the instructions properly and did not attach the qualified appraisals to his tax returns. Although the judge expressed sympathy towards the complexity of the forms and noted the couples under-valuation of the property; he denied the charitable deduction nonetheless.

Do not fall victim to the complexities of the IRS and the ever changing tax code (the charitable deduction form has changed since the Mohamed’s donation). This case demonstrates that good intentions will not garner mercy from the IRS, even when the fault lies in a seemingly minuscule technicality. Get the full value of your charitable deductions by using Hoffman & Associates and avoid the Mohamed’s costly headache.

http://www.ustaxcourt.gov/InOpHistoric/MohamedMemo.TCM.WPD.pdf