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Of course, you can give away money while you're still living even without a trust. However, there will be tax consequences if the amount is sufficiently large. You can give any amount to your spouse tax-free, and you can give up to $11,000 per year to anyone else without incurring a tax, but above this level you will incur a gift tax, and the amount will usually be the same as the estate tax you would have paid if
you bequeathed the gift upon your death. Irrevocable trusts are a way to further reduce the bite of estate taxes.
The rest of this section describes some of the more common types of irrevocable trusts.
Charitable Remainder Trust
The beneficiaries receive the income and the charity receives the principal after a specified period of time. The grantor avoids any capital gains tax on the donated assets, and also gets an income tax deduction for the fair market value of the remainderinterest that the trust earned. In addition, the asset is removed from the estate, reducing estate taxes down the road. While the contribution is irrevocable, the grantor may have some control over the way the assets are invested, and may even switch from one charity to another (as long as it's still a qualifiedcharitable organization).
CRTs come in three types: charitable remainder annuity trust (which pays a fixed dollar
amount annually), a charitable remainder unitrust (which pays a fixed percentage of the trust's value annually), and a charitable pooled income fund (which is set up by the charity, enabling many donors to contribute). Charitable Lead Trust
This is similar to a Charitable Remainder Trust, except that the charity receives the income and the beneficiaries receive the principal after a specified period of time.
Credit-Shelter Trust (also called a Family Trust or a Bypass Trust)
This is designed to enable a married couple to effectively double the amount they can protect from estate taxes by setting up a trust with an amount equal to the estate tax exemption ($700,000 in 2002). There are some important restrictions on such trusts, most notably the fact that they can only be funded with assets that the spouses own separately rather than jointly (although retitling circumvents this limitation).
Generation-Skipping Trust (also called a Dynasty Trust)
This enables a grantor to transfer up to $1 million (or $2 million for a married couple) to family members at least two generations younger (usually grandchildren). Grants in excess of this amount are subject to a 55% generation-skipping transfer tax.
Irrevocable Life Insurance Trust
This enables the shielding of life insurance from
estate taxes.
Qualified Personal Residence Trust
This enables the shielding of a home from estate taxes.
Many of the same suggestions for living trusts also apply for irrevocable trusts: get help from a qualified professional; keep all the relevantdocumentation in a safe place; choose the trustee carefully; and talk to the beneficiaries about the trust.
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