According to HG.org Legal Resources, the hallmark of an irrevocable trust is the grantor's surrender of ownership interest in the assets held by the trust. The grantor is the creator of the trust. An irrevocable trust generally cannot be amended, modified or revoked by the grantor under state law. That’s something you need to remember before you transfer property to an irrevocable trust.
The IRS rules on estate taxation are much stricter. The grantor must not have possession of the assets, lingering control over the disbursements to the beneficiaries, or any direct financial interest in the trust assets in order to have the trust recognized as a separate tax entity outside the estate. This makes irrevocable trusts an ideal vehicle for holding life insurance policies, in which the grantor usually has no stake.
Transferring Assets to an Irrevocable Trust
You may have to do several things to transfer stock to irrevocable trust, or do the same with any other asset.
Funding the Trust
Start by citing and identifying the assets in the trust instrument or formation documents. Some initial assets must be transferred to serve as the corpus and be named as such. Additional assets can be added over time, or the entire corpus can be named in the trust instrument.
Setting Up a Trust Fund Account
It would be best to establish a trust account if the trust is going to own cash or financial assets. These should be held in a separate account.
Banks and most retail brokers allow the creation of trust accounts, and will likely need a copy of the trust instrument. Transferring cash, securities or equities constituting all or part of the corpus named in the trust instrument perfects the document, consummating the trust.
Transferring Asset Titles to the Trust
You should transfer property titles to a named trustee after you've set up a trust account. The grantor makes the trust defective as an irrevocable trust for tax purposes if they act as trustee. This is only allowed with a revocable trust. An independent trustee should possess the title to all trust assets in property to be effective as an irrevocable trust.
Property can be re-titled through a deed. Cash and financial assets can be transferred to an account to which only the trustee has access.
Purchasing Life Insurance
As the grantor, you can purchase a life insurance policy and designated the trust or trustee as the named beneficiary. The American Bar Association provides information on the various kinds of life insurance trusts lawyers can draft for you.
But the IRS applies a strict incidents of ownership test when determining whether the insurance proceeds are eligible for inclusion in the estate for estate tax purposes. The test is similar to that used with an irrevocable trust. The grantor should assign all rights in the policy to the trustee or some other individual to prevent estate tax on the insurance proceeds.
Unlike revocable trusts (and other grantor trusts), irrevocable trusts are funded with after-tax donations. The transfers to the trust are not subject to the gift tax or gift tax exclusions. They are, however, taxed at a rate higher than most grantors' individual tax rates, which is why many irrevocable trusts are designed to pay most or all of their annual income to their beneficiaries.
A Word of Caution
The transfer of real property subject to a mortgage can result in the full balance of the loan coming due immediately. Always contact the lender before transferring real property that's subject to a mortgage.
- Unlike revocable trusts (and other grantor trusts), irrevocable trusts are funded with after-tax donations. This means that the transfers to the trust are not subject to the gift tax or gift tax exclusions. They are, however, taxed at a rate higher than most settlor's individual tax rate, which is why many irrevocable trusts are designed to pay most or all of their annual income to the beneficiaries.
- The transfer of real property subject to a mortgage can result in the full balance of the loan becoming due immediately. Always contact the lender before transferring real property subject to a mortgage.
Joseph Nicholson is an independent analyst whose publishing achievements include a cover feature for "Futures Magazine" and a recurring column in the monthly newsletter of a private mint. He received a Bachelor of Arts in English from the University of Florida and is currently attending law school in San Francisco.