What is an Irrevocable Trust and how is it different from a Revocable Living Trust?

All Revocable Living Trusts (RLTs) become Irrevocable Trusts at the death of the Trustor who created them. Irrevocable Trusts can also be created during life — but once you transfer assets in, you cannot get them back. That permanence is what makes them powerful for asset protection and estate tax planning, and also what makes them expensive to create and administer. Key administrative requirements for a lifetime Irrevocable Trust: • IRS Form 709 must be filed for all assets transferred into the trust • The trust must have its own Employer Identification Number (EIN) • The trust must file its own annual tax return Irrevocable Trusts in Washington last for 150 years before they are dissolved by statute — approximately seven generations. Christopher's recommended order of operations: 1. Pay off student loans, house, car, credit cards, and medical bills 2. Build cash savings 3. Then consider Irrevocable Trusts, Family LLCs, and investment products to avoid Washington Estate Tax

Who are Grantor Irrevocable Trusts appropriate for?

Irrevocable Trusts and Family LLCs are for people with a net worth in excess of $3 million and no debt — using the estate planning definition of net worth. Important definition of net worth for this purpose: Net worth specifically excludes your paid-off primary residence, your fully funded retirement accounts, your paid-off primary vehicle, and six months of personal emergency cash savings — because all of those are needed for you to live now and in the future. Net worth, for estate planning purposes, is what you can lose and still live at the same level you are living now. The Washington Estate Tax planning that creates the $9 million shelter — tripling the exemption from $3 million to $9 million — is available for $1,500 via Zelle. The Irrevocable Life Insurance Trust (ILIT) adds an additional $3,000 for estates above $9 million.

What is an Intentionally Defective Grantor Trust (IDGT) — and how does it get a step-up in basis?

It is possible to create an Irrevocable Asset Protection Trust, file IRS Form 709 reporting the gift to the trust (thus removing assets from the taxable estate and obtaining asset protection), and still receive a step-up in cost basis to the date-of-death value when the asset transfers at death. How it works — the Intentionally Defective Grantor Trust (IDGT): The IRS has specific rules under IRC §§ 671 and 673–678 that determine when a trust is a 'grantor trust' for income tax purposes. If the grantor intentionally retains certain powers in an otherwise irrevocable trust, the trust is treated as: • Irrevocable for gift and estate tax purposes — assets are removed from the taxable estate • A grantor trust for income tax purposes — the grantor continues to pay income tax on trust earnings The result: the grantor's payment of income taxes on trust earnings is itself a tax-free gift to the trust beneficiaries (because the trust is not depleted by tax payments), and the assets may still receive a step-up in basis at the grantor's death if structured correctly. Key distinction — Grantor Trust vs. Non-Grantor Trust: • Grantor Trust: grantor pays income tax on trust earnings; trust assets may receive step-up in basis • Non-Grantor Trust: trust pays its own income tax at compressed trust rates; assets generally do not receive a step-up in basis at the grantor's death

What is a Grantor Retained Annuity Trust (GRAT)?

A Grantor Retained Annuity Trust (GRAT) is an irrevocable trust strategy in which the grantor transfers assets to the trust and receives an annuity payment for a fixed term. If the assets appreciate faster than the IRS hurdle rate (the Section 7520 rate), the excess appreciation passes to beneficiaries free of gift and estate tax. How a GRAT works: 1. The grantor transfers assets to the GRAT 2. The GRAT pays the grantor an annuity for a fixed term (typically 2–10 years) 3. At the end of the term, any remaining assets pass to the beneficiaries 4. The taxable gift is calculated as the value of the assets transferred minus the present value of the annuity — if the annuity equals the full value of the assets (a 'zeroed-out GRAT'), the taxable gift is zero 5. If the assets grow faster than the Section 7520 rate, the excess passes to beneficiaries gift-tax-free Risk: If the grantor dies during the GRAT term, the assets are pulled back into the taxable estate. GRATs work best for assets expected to appreciate significantly — such as closely held business interests or pre-IPO stock.

What are the Doctrine of Merger implications for Irrevocable Trusts?

The Doctrine of Merger is a legal principle that applies when the sole trustee and the sole beneficiary of a trust are the same individual. When that happens, the legal title (held by the trustee) and the equitable title (held by the beneficiary) merge into one person — and the trust is extinguished. In plain terms: if you are the only trustee and the only beneficiary of your own trust, the trust ceases to exist as a legal entity. Your creditors can reach the assets just as if they were held in your own name. Why this matters for creditor protection: If the same property remained in trust — with a Successor Trustee serving rather than the beneficiary — the beneficiary would have creditor protection. A Successor Trustee has no duty to pay the creditors of a beneficiary. The Successor Trustee can simply wait until a bankruptcy is discharged, for example, before making any distributions. The critical rule: A beneficiary who is facing creditor claims should not be serving as Successor Trustee of their own share. As long as the trust has multiple beneficiaries and the beneficiary under creditor pressure is not also acting as Successor Trustee, the trust assets are protected.

Christopher S. Mulvaney, Esq. — Attorney-and-Counselor-at-Law — Professionalism with Integrity — WSBA#33595 — Licensed Only in Washington State

[email protected]Bellevue, WA

Grantor Irrevocable Asset Protection Trusts

Trusts Overview

Advanced Estate Tax Planning

Remove assets from your taxable estate — while retaining the income tax benefits of ownership.

A Grantor Irrevocable Asset Protection Trust removes assets from your taxable estate for gift and estate tax purposes, while the grantor continues to pay income tax on trust earnings — as if the trust were still revocable. This combination of estate tax removal and income tax retention is one of the most powerful advanced planning strategies available. Appropriate for clients with a net worth in excess of $3 million and no debt.

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