Using an Irrevocable Trust to Accomplish Your Gift-Giving Goals

As 2012 draws to a close, many people are opting to use the current gift tax exemption of $5.12 million for individuals and $10.24 million for couples to provide loved ones and other heirs with a portion of their inheritance tax-free. To utilize the higher gift tax exemption before it expires at the end of the year, however, a gift giver must relinquish control of the assets immediately. In order to accomplish their tax and estate planning goals, many people have chosen to create an irrevocable trust through which to transfer assets. Because the nation’s Internal Revenue Service will disallow any gift tax exemption where a grantor either directly or indirectly retains control over the assets, many important decisions such as exactly who will benefit from the trust and under what circumstances must be made well in advance of establishing an irrevocable trust.

Although a trust grantor may place requirements upon those who will benefit from an irrevocable trust, there are limits. For example, any request that would be considered contrary to public policy would normally be voided by a court. Discouraging marriage, mandating a divorce, or attaching criminal behavior requirements will normally not be allowed. Ambiguous trust provisions or those that are deemed impossible to satisfy will also generally be ignored by a court. Still, an irrevocable trust can usually be used to bypass the future partners of a spouse or impose seemingly odd requirements such as spelling a surname in a particular way. In Wisconsin, which irrevocable trust provisions will stand and which will fail is determined by state law.

Courts generally provide a fair amount of leeway with regard to many other considerations such as who will benefit from a trust. Despite this, it is important to be aware of often changing social norms and be sure to fully define who qualifies as a spouse and what constitutes a descendant where such terminology is used. For example, whether a trust grantor chooses to include domestic partners and, if so, whether a partnership must be registered should be addressed. Likewise, when a grantor uses the term “descendants,” he or she should state whether adoptees or stepchildren will qualify. Exactly how trust shares will be divided should be also included in the trust instrument. Additionally, a spendthrift provision that protects trust assets from most creditors should be incorporated into the document.

Some irrevocable trust grantors choose to include incentive provisions such as income matches or payment for stay-at-home parents. Although the sentiment is often well placed, such a tactic can backfire if the contemplated beneficiary chooses to follow a different life path. Trusts that provide for an asset such as a family vacation spot or other jointly owned property may be well intentioned, but it is a good idea for the gift giver to ensure the trust contains enough assets to properly maintain the property. Similarly, a well-funded irrevocable trust may be utilized to provide care for a treasured pet that happens to outlive the grantor. Regardless, a trust grantor should be wary of creating a trust that contains harsh or inflexible provisions that will not accomplish his or her true gift-giving goals.

If you would like to create a trust or amend your estate plan, we invite you to request an estate planning consultation with one of our experienced attorneys. We help clients with trust administration, probate matters, health care documents, powers of attorney, wills, and many other estate planning tools.

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