A trust is formed when a benefactor or grantor transfers assets into it to be used for the benefit of one or more beneficiaries. The assets are under the supervision of an authorized representative known as a trustee. Trusts are usually used for estate planning purposes, together with wills.
Trusts have been helping individuals safeguard and control the distribution of estate assets to their heirs for centuries. According to Lawrence M. Friedman in his book Dead Hands: A Social History of Wills, Trusts, and Inheritance Law, some $41 trillion will pass from the dead to the living in the first half of the 21st century in the United States alone.
One way to pass on an inheritance is by using an irrevocable trust. Unlike a revocable trust, it removes control of the assets from the grantor and makes it nearly impossible for them to modify the trust's terms.
An irrevocable trust's assets are usually not considered when calculating estate and income tax liabilities of the grantor. This type of trust is a separate, taxpaying entity in the eyes of the IRS, and like any taxpayer, it does need a name. A revocable living trust still remains under the control of the grantor so that individual remains responsible for payment of its taxes.
Purpose of an Irrevocable Trust
The primary purpose of an irrevocable trust is to transfer tax liability from the maker or grantor to the trust itself. This may come in handy for people with significant wealth.
Depending on state statutes and the language in the document governing a trust, the trust may receive a more favorable estate tax or death tax rate. Transferring assets out of the estate of the individual who originally owned the assets into an irrevocable trust has the effect of reducing the value of the grantor's estate to an amount that's exempt from federal estate taxes. Up to $12.06 million can be excluded from the value of an estate for estate tax purposes as of 2022.
Grantor vs. Non-Grantor Trusts
According to the Internal Revenue Code, a grantor trust is any trust over which the grantor or other owner retains the power to control or direct the trust's income or assets. A revocable trust is a grantor trust. The grantor can also be the trustee of this type of trust. Most living trusts fall under this category.
A grantor trust is ignored for income tax purposes. All its income and deductions are treated as belonging directly to the grantor and claimed and reported on that individual's tax return. An irrevocable trust is a non-grantor trust. The grantor relinquishes all rights and powers over the income and assets in the trust.
Taxpayer ID for Irrevocable Trusts
A revocable, grantor-type trust does not require an employer identification number (EIN) or tax identification number (TIN) because all income is taxable under the grantor's Social Security Number.
But a valid non-grantor-type trust requires a TIN in the name of the trust entity. The trustee will have to obtain a new EIN or TIN if a revocable trust changes to an irrevocable trust. This occurs at the death of the grantor.
Naming Conventions for Trusts
The name of an irrevocable trust is determined at the time an attorney draws the trust agreement on behalf of the grantor. The typical naming convention for an irrevocable trust includes the name of the grantor, the date the trust was created, and the name and designation of the trustee.
Suppose an irrevocable trust is created by Jane Z. Doe on July 4, 2022. The legal name of the trust would be "The Jane Z. Doe Irrevocable Trust Dated July 4, 2022, XYZ National Bank, Trustee." But you do have some flexibility here. You're not legally obligated to identify the name of the grantor in all states. You might call this example "The JZD Irrevocable Trust" if Jane wanted to remain anonymous.
Just take care not to select a name that's too far removed from that of the grantor to eliminate the possibility that it could be contested as not being authentic.
- American Bar.Org: Revocable Trusts
- American Bar.Org: Young Lawyers Network: Tax and Non-Tax Considerations when Drafting Irrevocable Trusts
- HG.Org: When Irrevocable Trusts can be Modified
- IRS.Gov: Estate Tax
- House.Gov: Subchapter J—Estates, Trusts, Beneficiaries, and Decedents
- IRS.Gov: Obtain a Trust Tax ID (EIN) Number | Online EIN Application
Mary K. Hogan currently holds a Certified Business Analysis Professional certification from the International Institute of Business Analysis and has held the designation of certified trust and financial analyst. Hogan has been a contributing writer online since 2009 and is currently working on her third children's book.