Irrevocable trusts are trusts that cannot be revoked or amended (with a few exceptions depending on the state that you live in). There are different varieties of irrevocable trusts and they may be used for a variety of reasons, including tax savings, protection from creditors, and charitable giving. Usually, irrevocable trusts will be used by individuals or families who either have or expect to have a taxable estate for estate tax purposes.

Gift Tax

A transfer of property to an irrevocable trust with nothing in return is generally treated as a completed gift for gift tax purposes (it may be a whole or partial gift, depending on the circumstances). The transfer may not qualify for the "gift tax annual exclusion" ($15,000 in the year 2018) because usually a future, rather than a present, interest in the trust property is created (i.e., the beneficiaries don't get immediate access to the property). 

Income Tax

The irrevocable trust will generally have its own annual income tax returns depending on the items of income, deductions, gain or losses on sale of assets, and credits that it has. In some cases, special provisions will be included in the irrevocable trust to treat it as a "grantor trust," which cause these items to show up directly on the trust creator's income tax returns. There are strategic decisions that may cause one form to be better than the other.

Estate Tax

In most cases, unless the creator of the irrevocable trust retains some interest or power over the irrevocable trust he or she creates, the assets of the irrevocable trust will not be included in the trust creator's "gross estate" for estate tax purposes. In other words, the assets of the irrevocable trust won't be added into the value of the assets that he or she owns at the time of death.

For those with a particularly high net worth, it is worth considering how irrevocable trust planning can be incorporated into the estate plan, as it may bring considerable tax savings to you and your family.

While estate planning fees generally are not deductible on your income tax returns, they may be deductible or partially deductible for the following reasons:

1. If the fee is considered a business expense.
2. If the fee is an expense for the production or collection of income, for the management, conservation, or maintenance of property held for the production of income, or in connection with the determination, collection, or refund of any tax.

Under item 2 above, you may be able to deduct a portion of the legal fees if they relate to tax planning.

If this applies to you, the lawyer you are working with may be able to estimate the portion of your legal fees that relate to tax planning. It is also a good idea to discuss this with your accountant to determine what is appropriate in your specific situation. For some of you, tax planning may be one of the most important aspects of your estate plan, so it doesn't hurt to ask!

College education planning is a huge part of estate planning, and doing it in the right way can help you save money in the long run. A gift that the federal government has given everyone is the 529 Account, which allows you to make annual exclusion gifts ($15,000 in 2018) to a special account established for your child's education. In addition, the money contributed grows income tax deferred, and is generally not included in your estate for estate tax purposes.

Financial Management

One of the key aspects of planning for college, however, isn't the available tax techniques but rather the management of your finances. If you're heavily in debt or don't have the money available to put away for your child's education, a 529 Account is pointless. After all, you have to take care of your families basic needs before planning for future ones.

That being said, if you and your family have additional resources, placing them into a 529 Account can be a huge benefit to your children. The money that you put into a 529 Account, if you invest it wisely while the child is still young, can grow over time, so that when you do eventually need to pull money out, it may be substantially greater than what you put in.

Estate Planning

On the gift tax, income tax, and estate tax side, a 529 Account makes a great deal of sense as well.

First, because you are making an annual exclusion gift, there is no gift tax that is due on your contribution.

Second, because the account grows with income tax deferred, there is no income tax to pay on the growth of the account.

Finally, the amounts you contribute aren't considered part of your estate for estate tax purposes, so they will not be counted when determining whether any estate tax is due.

Potential Risks

Although 529 Accounts have a great number of benefits, there are some things to be aware of.

First, if you elect to contribute 5 years worth of annual exclusion gifts to a 529 account in a single year (a special feature that's available for these types of accounts) and you die prior to the 5 year period, a proportion of your contribution will be included in your estate tax for estate tax purposes.

Second, while withdrawals for qualified educational expenses are completely tax free, non-qualified distributions are subject to a 10% penalty on the account's earnings as well as taxation at the recipient's income tax rate.

For many, the benefits of a 529 Account far outweigh the risks, and are a very useful way to help families afford the high cost of college education. 

Learning about how your state handles estate planning is a great starting point to gaining a better understanding of why it is important. Conveniently, the State Bar of California has a wealth of information to serve the general public on a variety of legal topics topics. Here's the page for free legal information.

If you go to that page, you will see that 3 of the 12 guides is about estate planning, which just goes to show you how important the topic is. They include the following guides:

1. Do I Need a Will?
2. Estate Planning
3. Living Trust

Having an understanding of why estate planning is important for everyone--young or old; poor or wealthy--is super important, and one of the best starting points if you're on the fence about getting started.