Trust Structures Explained

A revocable trust (also called a living trust) can be amended or revoked by the grantor during their lifetime. Assets in a revocable trust are still considered part of the grantor's taxable estate. The primary benefit is probate avoidance — assets transfer to beneficiaries without going through court.

An irrevocable trust, once established, generally cannot be modified without beneficiary consent. The grantor relinquishes control of the assets, which removes them from the taxable estate. This is a primary tool for estate tax planning and asset protection from creditors.

Key distinction: Control vs. protection. Revocable trusts preserve control; irrevocable trusts provide superior protection.

A trust is domestic if a U.S. court can exercise primary supervision over trust administration and one or more U.S. persons have authority to control all substantial trust decisions (the "court test" and "control test" under IRC §7701(a)(30)).

A foreign grantor trust is one that fails either test. While complex in administration and reporting requirements (Form 3520, Form 3520-A), foreign trusts can provide significant asset protection and estate planning advantages for internationally mobile clients.

Important: Foreign trust structures carry substantial reporting obligations. Non-compliance penalties are severe. Professional guidance is not optional here.

Sophisticated estate plans often layer multiple trust structures. A common architecture:

1. Irrevocable Life Insurance Trust (ILIT) — holds life insurance policies outside the taxable estate, with proceeds payable to beneficiaries trust-free.

2. Spousal Lifetime Access Trust (SLAT) — an irrevocable trust funded by one spouse for the benefit of the other, removing assets from the estate while maintaining indirect access.

3. Domestic Asset Protection Trust (DAPT) — available in select states (Nevada, South Dakota, Delaware), allows the grantor to be a discretionary beneficiary while protecting assets from future creditors.

Layering requires careful attention to tax basis, gift tax implications, and the step-transaction doctrine.