The risk of property loss is everywhere, and you need to plan ahead. Accumulating wealth is not easy, and there are risks that can cause you to lose everything you have built over a lifetime. However, the U.S. has well-established trust laws that provide a full range of legal tools to protect and pass on personal and family wealth.
Other functions of establishing an irrevocable trust
●tax avoidance function
The U.S. estate tax is part of the personal asset transfer tax and has one of the highest rates of federal taxes. The government provides that an estate includes all a person's property during his or her lifetime, which includes movable property, real estate, stocks, bonds, insurance income, pensions, etc. Not all estate is taxed, but the tax is calculated upon the remainder of estate after deducting funeral expenses, lifetime debts, charitable contributions, and personal exemptions.
● Segregation of property
Once a trust is set up, the property funded into the trust becomes part of trust, and when the settlor is not the sole beneficiary, the trust property is not treated as his or her estate or liquidation property. Therefore, if a family trust is set up and the settlor is not the sole beneficiary, the property incorporated into the family trust will be protected from losses such as liquidation and if the settlor suffers bankruptcy, divorce, or separation during the life of the trust. This is reflected in the divorce between Murdoch and Wendi Deng. Through the family trust, Murdoch ensured that his children from his two former wives retained voting rights in their media corporation, while Wendi Deng and her two daughters were only compensated for property, but not the voting rights. The property segregation mechanism is a good safeguard against the risks associated with divorce, family business fighting, inheritance fighting, spendthrift, and etc.
● wealth inheritance
Avoiding the squandering of wealth by future generations. No one is more famous than the Rockefeller family, for example, who founded Standard Oil. This family, which relies on the family trust clause that only those who are capable can participate in the management of the business and receive dividends before the age of 30 and can only get the principal after the age of 30, has prospered over the centuries with few disputes over family wealth. As you can see, wealth is not a magic spell, and family trusts can be a great way to help wealthy people pass on their wealth to their children and grandchildren.
What are the categories of irrevocable trusts?
An irrevocable living trust, Living trust is a written legal document that can be used as to substitute a will. You can put your personal assets (such as your home, bank accounts, stocks, etc.) in a trust that will be administered by a trustee for you during your lifetime and transferred to your beneficiaries upon your death. Most people will name themselves as trustees to manage the trust assets. The advantage of this approach is that you can still control the assets during your lifetime even after they are funded to the trust, or you can appoint a separate successor trustee (individual or institutional) to manage the assets if you are unable or do not intend to administrate the trust on your own.
Credit shelter trust, also known as marital deduction trust. The purpose of this trust is to maximize the function of the marital deduction. A credit shelter trust, also called an inheritance trust, allows assets to be passed on to future generations in some way that avoids estate taxes. Under the credit shelter trust model, the heirs do not have to receive the property (which would be subject to estate taxes if they received it outright) but rather receive the interest from that portion of the trust.
A credit shelter trust, for those spouses whose estate has exceeded the tax exemption, allows the couple to avoid paying taxes twice on the same property if they inherit the spouse’s property. Normally, the estate would be taxed once at the death of one spouse and a second time at the death of the other spouse.
Generation-skipping trusts, also known as "dynasty trusts," allow tax-free money to be passed down to later generations, i.e., grandchildren.
A Qualified personal residence trust (QPRT) is a way to take the value of a property out of the estate. The purpose of a personal residence trust is to make a gift of property to your children. At the same time, you still retain the ownership of the property. You will still be able to live in the home at this time.
Irrevocable life insurance trust (ILIT) can keep life insurance out of the estate.
Irrevocable foreign situs trusts (IFTs) are an excellent way to reduce the amount of foreign property in the U.S. for tax purposes. For example, if a guest is a foreigner, not a resident of the United States, and invests in real estate in New York City. If the client himself/herself invests directly, he/she may have various federal income tax issues because all income generated by this property must be reported for tax purposes. Not only that, but if this client dies, there will be estate taxes. By setting up an irrevocable foreign trust, the appreciation and economic income of this property are not subject to income tax, and the property is not subject to the U.S. estate tax after this person's death.
A QTIP trust, or qualified terminal interest property trust, is a type of trust for married couples that allows the creator's spouse to benefit from the trust property during his or her lifetime, and the trust property ultimately passes to the beneficiaries designated by the trust creator upon the death of the spouse. A QTIP trust is created upon your death. You can set up such a trust through a will or declaration of trust that puts some property (property in excess of the estate tax exemption) into the trust for the benefit of the spouse in a document that provides the trustee with a list of instructions that clearly state who will receive or benefit from the trust property after the spouse's death. The spouse can receive all of the proceeds of that trust property (e.g., dividends from stocks, bond interests, etc.).