Estate planning is crucial for preserving wealth and ensuring a smooth transition of assets. An irrevocable trust is often used as part of an estate planning strategy.
As a legal document in which a grantor transfers asset ownership to a reliable trustee, the irrevocable trust may protect assets from creditors, lawsuits, and control over distributions to beneficiaries depending on state laws and the structure of the trust. These trusts generally bypass probate, allowing for a smoother transfer of assets to beneficiaries.
When the Grantor Dies
One question that comes up frequently is what happens to an irrevocable trust when the grantor dies. Two things occur upon the grantor’s death.
Finalization of the Trust
While the irrevocable trust remains intact, the trustee is responsible for following asset distribution and management instructions. The trustee could also sell or retain the investment property, handling rental income management and financial oversight.
Beneficiaries Receive Distributions
Those named in the trust as beneficiaries might receive a lump sum, staggered, or income-only distributions. The trust might also continue managing assets for minors or incapacitated beneficiaries. If the trustee is directed to sell the investment properties, the beneficiaries could receive the proceeds based on what is outlined in the trust.
Tax Implications
When the grantor dies, the irrevocable trust could be open to certain tax ramifications, such as the following.
Estate Tax Exemptions
Assets held in an irrevocable trust are generally not included in the grantor’s estate, which can potentially reduce the estate’s tax liability. This factor can allow for the tax-free transfer of wealth between generations.
Step-Up in Basis
Some irrevocable trusts allow for a step-up in basis, meaning that assets (such as real estate) are revalued at their fair market value at the time of the grantor’s death. A step-up in basis can potentially reduce capital gains taxes for beneficiaries if they decide to sell inherited properties.
Continuous Tax Filings
When the grantor dies, the trust might still generate income from real estate in the form of rent. Because of this, the trustee is responsible for filing the trust’s annual tax returns and ensuring proper treatment of the distributions.
The Importance of Reviews
Establishing an irrevocable trust is one step in estate planning. While it’s difficult to modify an irrevocable trust, the grantor should review all estate plans with an estate attorney to ensure that:
- The trustee appointments remain current.
- The beneficiary designations align with family and financial goals.
- Tax strategies remain optimized under changing laws.
Understanding the role of trustees, tax implications, and property management in an irrevocable trust can ensure that wealth is preserved and distributed efficiently. If you need assistance refining your estate plan, Realized 1031’s experts can help advise you on trust strategies, wealth transfer, and tax efficiencies. To learn more and to set up a no-obligation consultation, visit realized1031.com.
The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
