What Are Irrevocable Trusts?
Irrevocable trusts are trusts that grantors have created to hold property where the trust instrument may not be revoked or changed. Be aware that gift taxes may apply to the property gifted into these trusts. If the transfer is taxable, the grantor must complete Form 709, a gift tax return.
All irrevocable trusts have the following elements in common:
The grantor gives up all right, title, and interest to the assets held in the trust, and gives up any right to terminate the trust.
The property held by the trust is used for the benefit of the named beneficiaries or other interests defined by the trust instrument.
The remainder interests, entities who can receive what’s left of the trust property when the trust terminates, are clearly named in the trust instrument.
When a grantor funds an irrevocable trust and is neither a trustee nor a beneficiary of the trust, he or she forfeits all right to that property. Legally this constitutes a gift. This gift may be subject to gift taxes depending on size.
If the grantor makes a taxable transfer to an irrevocable trust, he or she will have to complete a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. Note that any amounts over the amount of the annual exclusion qualify as taxable transfers. The grantor must give the name and taxpayer ID number of the trust, and show the size of the gift.
There are several things to consider when completing Form 709:
Taxable Estate: Usually the grantor won’t have to pay a tax on the transfer but this return is included as a part of the grantor’s taxable estate, which affects the total estate tax due at the grantor’s death.
Gift-splitting: Married couples can minimize gift tax consequences if the two spouses each show one-half of the gift on their Forms 709, which cannot be filed jointly.
A couple can split the gift even if they didn’t own the gifted property jointly. Splitting gifts doubles the amount of annual exclusion gifts available to the grantor and reduces the amount of any taxable transfer.
Skip Persons: If the transfer to a trust is for the benefit of a skip person you must also complete the generation-skipping part of Form 709. A skip person is defined as a grandchild, distant relative, or a nonrelated person who is more than 37-1/2 years younger than the grantor.
Property gifted irrevocably into a trust keeps the same basis, or acquisition cost and acquisition date, as it had in the grantor’s hands. If the asset has depreciated in value from the grantor’s original basis, the basis will be the lower of cost or market value at the time of transfer. This is crucial in determining whether there’s a taxable gain or loss when the trustee disposes of the property.