Copyright 1996, Marc S. Weissman
Certified Specialist: Estate Planning, Trust and Probate Law
Certified by the California Board of Legal Specialization of The State Bar of California
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IRREVOCABLE TRUST

This Article is designed to be of general interest. The specific techniques and information discussed may not apply to you. Before acting on any matter contained herein, you should consult with your personal legal adviser.

An Irrevocable Trust is a method of making lifetime gifts to a beneficiary without directly giving that beneficiary full ownership rights over the gifted property.

There are several reasons to consider such a Trust.

Transfer of Wealth and Future Growth
If structured properly, the gift is transferred from the Donor's asset base. Future growth of that asset, as well as income generated by it, are removed from the Donor's wealth.

Tax Free Gifts
Under the Tax Code, a Donor may give an unlimited number of Donees $10,000 each, every year, IF the gift is of a present interest.

    Gifts not within this $10,000 per year rule are subject to gift tax. This really means that such gifts begin to eat up an individual's lifetime tax free $600,000 amount.

    For example, a single person gives his friend a $15,000 Christmas present. It is the only gift he has ever made. The first $10,000 is tax free to everyone; the excess $5,000 is a "taxable gift" to the Donor.

    In this example, no tax is actually owed, but when the Donor later dies, rather than being able to leave $600,000 tax free, he has consumed $5,000 of that amount and may leave only $595,000 tax free.

    This $15,000 gift was poorly planned. The Donor should have given $10,000 for Christmas, and the rest the following week, in the new year; then all would have been tax free. Or, for Christmas, he could have given $10,000 to the Donee, plus $5,000 to the Donee's spouse [but there can be no pre-arrangement that the Donee's spouse will turn it over to the Donee].

A problem with an Irrevocable Trust is that the beneficiaries do not get the benefit until a later time. This means that the rights they may have at the time of contributions to the Trust are gifts of "future interests" and are therefore taxable gifts.

Since a gift in an Irrevocable Trust is a gift of a future interest, how do we make contributions eligible for the annual $10,000 tax free gift rule?

Crummey Powers
To convert the gift to a "present interest," rather than a gift of a "future interest" in order to qualify for the $10,000 per donor rule, in the 1960's a taxpayer with an unfortunate name (Mr. Crummey) came up with an ingenious idea (which the IRS did not like, but they lost the case). If your beneficiaries have the right, whether they exercise it or not, to take the gift out of the Trust, the gift is deemed to be a present interest. This means that it is now eligible for the favorable $10,000 per year rule. Therefore, we use "Crummey Powers" in Life Insurance Trust,s giving each beneficiary the right to take gifts out of the Trust during a 30-day window of opportunity. Once the 30 days have expired, the window has shut until the next contribution is made (when it re-opens just for the new gift).

Of course, we do not expect any beneficiary to take the gift out of the Trust. Rather, they have economic incentive to leave the gift in the Trust where they will eventually receive more. However, having the mere right (even though they do not use it) to take the gift out of the Trust is sufficient to qualify the gift as a present interest.

This is a noncontroversial technique which the IRS does not attack any more, having consistently lost if the following rules are followed:

  1. Every time a contribution is made to the Trust, the Trustee must notify each beneficiary of his right to take out his proportional share of the contribution from the Trust;
  2. Notice to minors or incompetent beneficiaries may be given to the guardian, or other appropriate persons;
  3. If the funds have already been spent on an investment (such as an insurance policy), the beneficiary is then entitled to take from the Trust his proportional share of that investment.
Obviously, the beneficiaries have no motivation to take the gifts from the Trust and in all likelihood will allow the anticipated plan to work, although they have not previously agreed to do so and are under no obligation to allow the gifts to remain in the Trust.

However, the Crummey Withdrawal Rights are sufficient to convert the gift to a present interest, eligible for the annual $10,000 tax free rule.

The major attribute of an Irrevocable Trust is that it is irrevocable. If you form a Trust for the benefit of all of your children equally, and later would like to 'disinherit' one child, you cannot change the Trust. All you can do is to stop making additions to the Trust.

Uses of Irrevocable Trust
The Irrevocable Trust is most useful for a person whose net worth is over $600,000, to make lifetime gifts to his heirs without giving full control to those heirs. It is also useful as a Dynasty Trust for asset protection of the lifetime gifts.

LIFE INSURANCE
A major use of an Irrevocable Trust is to purchase Life Insurance. See Life Insurance Trust

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