Revocable vs. Irrevocable: Trusts for Tax Reduction

Every trust has a purpose. Avoiding probate and asset protection are common reasons for establishing a trust. Every trust is also either revocable or irrevocable. When choosing trusts for the purpose of tax reduction, it’s critical to understand the difference between revocable and irrevocable trusts.

Revocable vs. Irrevocable – Some Basic Differences

The biggest and most basic difference is that revocable trusts can be changed. Irrevocable trusts cannot be changed, at least not easily.

However, the “revocable vs. irrevocable” characteristic of a trust also determines what can be accomplished with the trust. In this article, we are specifically concerned about trusts for tax reduction. Therefore, we will take a look at a few trusts that typically offer significant tax advantages and whether those trusts are revocable or irrevocable.

Irrevocable Life Insurance Trust

Life Insurance proceeds usually are not taxed. However, the proceeds can be included in your estate, which may increase your taxable estate. After the irrevocable life insurance trust is created, the grantor will make the trust the sole beneficiary of the life insurance policy. At the grantor’s death, the insurance payout usually goes directly to the trust and avoids inclusion in the grantor’s taxable estate.

Qualified Personal Residence Trust

The grantor transfers his or her ownership interest in a house to an irrevocable qualified personal residence trust. When the trust terminates, the beneficiaries take ownership of the house. In the meantime, the grantor continues to live at the property rent free. The property’s market value is frozen at the time of transfer. In addition, the grantor does not pay gift tax.

Grantor-Retained Annuity Trust and Grantor Retained Unitrust

Both of these trusts allow the grantor to transfer ownership of income-producing assets like real estate or stock to a GRAT or GRUT trust. Both types of trust are irrevocable. The grantor will continue receiving income, but the assets typically are removed from his or her taxable estate.

Learn More About Trusts and Tax Reduction

There are advantages to both revocable and irrevocable trusts. However, when it comes to using trusts for tax reduction, irrevocable trusts are the clear frontrunner. The IRS generally gives no tax breaks to revocable trusts. Before establishing any trust, talk to an experienced attorney.

At Law Offices of John Mangan, P.A., we help clients choose strategies that meet their needs. Please contact us at 772-324-9050 to schedule an appointment or fill out our Contact Form. We are located in Palm City, Florida, and serve clients in surrounding communities like Stuart, Hobe Sound, Port St. Lucie, and Jupiter, too.

Written by John Mangan, Esq.

John Mangan, Esq.

I’m an attorney in Palm City, FL, and I serve clients throughout Martin County, including Stuart, Palm City, Hobe Sound, and Indiantown, as well as those in St. Lucie County, the Treasure Coast, Palm Beach County, and other parts of Florida. The Law Offices of John Mangan, P.A., is an innovative firm providing estate planning services to clients in Florida. We focus primarily on wills, trusts, asset protection, guardianship, and probate administration.