An irrevocable trust cannot be amended or terminated by the grantor. Typically, the grantor cannot directly manage the assets in an irrevocable trust.
Although the irrevocable structure is quite rigid, there are two advantages. Assets in an irrevocable trust are usually protected from creditors. They're also not included in the assessment of estate taxes when the grantor dies.
Living trust vs. testamentary trust
A living trust is created during the grantor's lifetime. Assets in a living trust do not go through probate, which is the lengthy court process of settling the grantor's estate.
A testamentary trust is created by a last will and testament. It is established after the grantor dies. Testamentary trusts go through probate.
Bypass trusts and marital trusts
Bypass trusts and marital trusts can be used together to reduce estate taxes and provide financially for a surviving spouse and children. This dual-trust strategy may be appropriate for wealthy couples whose net worth exceeds the estate tax exemption.
Typically, the bypass trust takes ownership of assets valued up to the estate tax exemption. Once in the trust, these assets are no longer included in the surviving spouse's net worth. When the surviving spouse dies, this wealth should pass to the remaining beneficiaries -- usually the children -- without the assessment of estate taxes.
The surviving spouse can usually receive income from the bypass trust. He or she may also be able to withdraw principal under certain conditions, such as chronic illness.
Any remaining assets above the estate tax exemption go into the marital trust. The surviving spouse has greater control of these vs. the assets in the bypass trust. Marital trust assets are subject to estate taxes when the surviving spouse dies.
Generation-skipping trust
A generation-skipping trust is an irrevocable trust that names a beneficiary who is at least 37 1/2 years younger than the grantor and not the grantor's spouse. This trust type falls into the family trust category when the beneficiary is also a family member, such as a grandchild.
The purpose of a generation-skipping trust is to minimize estate taxes that would otherwise be paid over two generations. There is a sticking point, though. Amounts transferred into the trust that exceed the generation-skipping tax exemption are subject to a 40% generation-skipping tax.
