If you die tomorrow, are your assets going where you want them to go?
An irrevocable living trust is a legal instrument used as an effective means of avoiding probate, reducing income tax on certain assets, and reducing taxes on inheritances such as money, real estate, investment accounts, and other assets.
The major differences between a revocable living trust and an irrevocable living trust is the fact that once your assets have been transferred to an irrevocable trust, it is permanent and you can't change your mind at a later date. The control over your assets are lost until your death, at which time, your beneficiaries take full responsibility for them.
In a sense, you give your assets away. This is one of the irrevocable living trust's most outstanding disadvantages. The wealthy traditionally use irrevocable living trusts because it is a way to offset or greatly diminish tax liabilities. The wealthy may not have an up front financial need for the assets, or for the income derived from the assets. By strategically placing a portion their assets in revocable trusts and other financial vehicles, although they don't physically control the assets, they are kept in tact for the next generation of family.
An irrevocable living trust is very seldom used by people with modest incomes because, once assets are put in this type of trust, the assets must not be used and the the income from the assets cannot be used to support themselves or anyone else.
These are the main advantages of an irrevocable living trust:
•Tax on income derived from assets in an irrevocable trust is payable by the trust, or by family members who are paid an income from the trust. The family members are usually in a lower tax bracket, thus making it possible for the lowering of income tax liabilities.
•The assets in the trust are not counted as part of the estate, helping to offset some of the estate taxes.
•The beneficiaries pay no inheritance taxes.
The tax advantages of an irrevocable living trust are great, even for people of modest means, but the disadvantages are even greater. The trust requires that you give up your assets forever and a person of modest means may need to control their assets, for their own support, the support of children or other family members, or for eventual retirement.