F. Paul Maloof, Esquire
A partner with Redmon, Peyton & Braswell LLP
An irrevocable trust creates a legal entity that involves three persons -- the grantor, the trustee and the beneficiary -- with the purpose of transferring title to assets from one person into the trust without the right to regain the ownership over the assets at some future date. This type of trust is generally used in estate planning cases.
For example, a properly structured irrevocable life insurance trust can avoid probate costs and fees, and estate taxes on the insurance proceeds paid to the trust upon the grantor's death. Irrevocable trusts are also useful in providing children, especially those over age 14, with a fund for education or other specific planning purposes.
There are several important questions that a person must ask before creating this type of trust because the control of ownership over assets will be entirely transferred to another person -- the trustee. Perhaps the most important question is whether the trustee will be loyal and trustworthy, since the trustee will have the power to sell the assets, to borrow against the assets, and to distribute the proceeds of the assets to the beneficiary.
Revocable living trusts
A revocable living trust generally is a taxable entity that involves three persons -- the grantor, the trustee and the beneficiary - however, the ownership of the assets is retained by the grantor until death. By retaining the ownership of the assets that are transferred into the trust, the grantor has the right to change the character of the asset.
The benefit of using a revocable trust is that during his or her lifetime, the grantor is also the trustee and beneficiary. As trustee, the grantor can manage and control the trust property; as beneficiary, the grantor receives all of the benefits of the trust assets. Upon the death of the grantor, a “successor trustee” (child, friend, bank, etc.) takes over as trustee and follows the trustor's instructions, which are set forth in the trust, concerning the distribution of property and the payment of taxes and expenses.
For example, a businessperson establishes a revocable living trust and transfers a whole life insurance policy into the trust. If a revocable trust is used, then at any date in the future the grantor can change the beneficiaries and the percentage of the distributions of the insurance proceeds. These rights to make changes are considered in the eyes of the law to be incidents of ownership. If the assets are owned on the date of death, then those assets are caught in the taxable estate of the decedent and the government takes a tax bite out of the total amount of the value of the assets.
F. Paul Maloof and his colleagues at Redmon, Peyton & Braswell, LLP have extensive experience in this area of estate planning and can guide you on the best ways to establish and manage either a revocable trust or an irrevocable trust. Please contact us by filling in the form below, or call us at (703) 684-2000.
F. Paul Maloof
510 King St., Suite 301
Alexandria, VA
22314-3132
Tel: 703-684-2000 Ext. 54