3 Primary Uses for Irrevocable Trusts in Estate Planning

Irrevocable trusts are a type of estate planning tool that can be used for a variety of different applications. Here are some of the primary uses for irrevocable trusts and how they work.

1. Expanding

One of the primary uses of irrevocable trusts is expanding wealth. One way that this can be done is through the use of an irrevocable life insurance trust. With this type of scenario, an individual is going to purchase a life insurance policy and put it into an irrevocable life insurance trust. At that point, the individual can name a beneficiary, or multiple beneficiaries, for the life insurance policy. The person that purchased the life insurance policy is no longer going to be the owner of the policy. The policy will be tied to that individual's life, but the trust is actually going to be the entity that owns the policy. Therefore, whenever the person passes away, the money is going to be transferred from the trust to the beneficiaries of that trust.

The dynasty trust is another type of trust that can be used in order to expand family wealth. An individual can set up this type of trust so that subsequent generations will be able to benefit from the money. This is done to minimize the impact of estate taxes over multiple generations.

2. Replacing

The irrevocable trust is also a tool that can be used in order to replace wealth. With a wealth replacement trust or charitable remainder trust, you will be able to create a regular source of income for yourself. With this type of trust, you can designate certain assets into the ownership of the trust. You will then be able to receive a regular income from these assets for the rest of your life. For example, with a charitable remainder trust, you are going to be able to get a payment of a fixed percentage of the assets in the trust every year for the rest of your life. This allows you to benefit from assets that are not technically owned by you anymore.

3. Shifting

With an irrevocable trust, you will also be able to convert or shift wealth from one person to the other. For example with a QTIP trust, you will be able to allow an executor of your estate to make the distribution decisions after you pass away. With this method, you will be able to decide exactly who is going to get your assets whenever you pass away, such as children from a previous marriage.

Another example of this is a grantor retained interest trust or GRIT. With this type of trust, an individual is going to put a certain amount of assets into a trust arrangement. That individual is going to receive annuity payments from the trust for a certain amount of time. At the end of that time, the individual that set up the trust can then pass the assets onto a beneficiary that they choose.

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