Irrevocable Trusts - Frequently Asked Questions
In terms of irrevocable trust law, a trust agreement that is established as irrevocable can't be revoked except under unusual circumstances.
There are many uses for an irrevocable living trust. A family business, for example, may have aging family members responsible for managing the operation. In the case that a key manager would become senile, irrevocable trust law would enter the picture.
An irrevocable living trust may also be used to avoid estate and/or income taxes. In these instances, the trustor must not have any direct or indirect power or control over the trust property or income. Even when using an irrevocable living trust, one must abide by the regulations established by the Internal Revenue Code.
In an irrevocable living trust, what is the difference between a charitable remainder unitrust and a charitable remainder annuity trust?
Within irrevocable trust law, the major difference is the valuation of the assets of trust, which will establish part of the calculation that determines the amount of income to be received by the income beneficiary(ies). When establishing the irrevocable living trust, the annuity assets are valued at the time when they are first placed in the trust. From that point, they are never revalued. The annual payments remain the same, regardless of whether the assets appreciate or depreciate in value.
In charitable remainder unitrust, the assets are valued annually. If the assets appreciate, the beneficiaries named by the irrevocable living trust will receive more income. If the assets depreciate, the payment will decrease as well.
If I have established assets in an irrevocable living trust for a charity, what happens if the charity goes out of business before the trust expires?
According to irrevocable trust law, your trustee is authorized to name a substitute charity, provided the initial charity was the sole charity named in the irrevocable living trust.
When I am establishing an irrevocable living trust, should I name a charity as trustee of my charitable remainder trust?
Often with irrevocable living trusts, this is done if an organization is qualified to act in this fashion under local law. It is well within the bounds of irrevocable trust law for an organization's representatives to perform that function, and many will serve without fee.
With an irrevocable living trust, can I use my insurance to benefit charitable organizations?
According to irrevocable trust law, you can. An area often overlooked, you can name one or more charities as alternate or as primary beneficiary. In addition, an irrevocable living trust allows you to transfer the policy to the charity or charities if you no longer need the proceeds for your estate. You'll only receive a charitable gift deduction if you choose that course of action, but any additional premiums you pay from that point forward are tax-deductible. Upon your death, irrevocable trust law states that the charity receives the balance of the policy proceeds and none of that sum is included as taxable in your estate
For an irrevocable living trust, how can I fund a charitable gift annuity, and how is the subsequent income calculated?
With an irrevocable living trust, the common funding sources for a charitable gift annuity are cash and marketable securities. Tax benefits can be associated with the gift of appreciated securities (the current market value exceeds the cost or basis value). Because a gift annuity is considered partially a gift and partially an annuity, irrevocable trust law stipulates that part of the gift is not subject to capital gain tax entirely. Real estate and other marketable assets may also be used. Generally with irrevocable living trusts, the charity will convert the assets to cash in order to fund the annuity.
Irrevocable living trusts state that the income provided you by the annuity is determined by your age and the age of any additional beneficiary. It is calculated using tables established and filed with regulatory agencies under which the charity operates its annuity program.
With an irrevocable living trust, can I set up a charitable gift annuity and delay the start of the income until I need additional income, such as during retirement, when my income will likely decline?
Irrevocable living trusts have flexibility when establishing charitable gift annuities. It's what makes them a popular and effective retirement planning vehicle. Using a deferred gift annuity, the annuity earnings accumulate on a tax-deferred basis. Thus the deferred payment annuity accomplishes several things in the irrevocable living trust: First, the donor receives a tax deduction in the year the annuity is established, which would in theory be when the donor is in a higher tax bracket. Second, the gift to the charity becomes larger as the deferred earnings increase the annuity's principal. Finally, because the deferred payment annuity grows in size during the period that income is deferred, the ultimate income will be substantially greater on an annual basis.