Ultimogeniture

and finance Allah shmoop What are irrevocable versus revoke A

ble trusts So first let's start with the trust What

is it Well it's just a legal entity or thing

that exists for pretty much of the sole purpose of

housing one's assets Owned a home owned some stocks own

some bonds own a Chevy Camaro with blood stains on

the door handle And don't ask why all of these

would likely go into a trust so that when you

die there's no ambiguity as to what your assets are

where they're headed and how your will is You know

disposing of them Think of assets like ah financial freezer

in this sense So then what's the difference between an

irrevocable and a revokable trust Well specifically the difference has

to do with taxes or the tax treatment of the

transfer of those assets Surprise Surprise Legally there's some basic

amount of dough that parents and grand parents are allowed

to transfer to their paste eating progeny each year without

tax Let's say that magic number is 18 grand a

kid and that means that for Johnny here get your

finger out of there His mama can grant him $18,000

in appreciated Coca Cola stock and his daddy Khun give

him $18,000 in poker chips from Caesars Palace That 36

grand is given to his trust Ear Revoke obl e

That is The money is now his It's Johnny's It

does not belong to his parents period It's done Done

deal Well the simplest difference between the two concepts is

that assets remain in the grand tours A state in

a revokable trust meaning they can revoke it or take

it back of the grand tour Is Mom and Dad

here The grantee is the kid but in an irrevocable

trust They move out of the estate of Mom and

Dad and they just belonged to Johnny Well the primary

reasoning behind the irrevocable trust is that there are many

good reasons for clients to want to move assets out

of their estate Namely you know for protection against litigation

for optimization the taxes like capital gains taxes and the

state taxes Well depending on how their trust is set

up they may or may not be able to restrict

what little Johnny there does with the money but they

no longer have control over it and as a result

that money is then transferred to Johnny Tax free If

they still had control over it well then there probably

apply attacks So what does this matter So much wealth

The wealthy in this country pay something like 50% tax

when they give money to their kids That is after

a certain point because yeah that 1st 11,000,000 of transfer

is free and that 11,000,000 might seem like a lot

But if you had a farm in your family that

you've had for 100 years in its market value is

20,000,000 Well most people have to sell the farm to

a large corporation because they can't afford The tax is

above that 11,000,000 bucks and it's likely that that 11,000,000

figure is probably going to come down in the future

So if you have even a crappy house in Palo

Alto middle of Silicon Valley and your grand parents want

to send it via its $5,000,000 for an acre and

well you'll have to sell that and you won't be

able to keep the house and all that So there

are all kinds of complexities because things cost so much

more in the big city than they do in rural

areas Yet there's one federal number that applies to everything

and you might think $5,000,000 a lot for a house

Well here's what that buys you in Palo Alto California

So they're also applies this thing called a generation skipping

tax It applies to a bunch of cases So you

can imagine that a grand parent with an IRA with

$1,000,000 in it then dies that IRA first has to

distribute money so that the grand parent is taxed at

50% ordinary income So that $1,000,000 to the grand parents

that becomes 500 grand on the day Grandpa dies But

Grandpa wanted to give that 500 grand to his grandson

Booger eater over there Yeah he can't just wheel the

money to him Instead that money gets tax first as

if it was given to Johnny's also awesome parents where

it would suffer than a 50% tax rate and it

becomes 250 grand and then upon it being distributed to

Johnny Booger Eater There that 250 grand would again be

tak and it becomes $125,000 So yes you heard that

right The $1,000,000 in Grandpa Pas ira became only 125,000

by the time the government was through Taxing the crap

out of it Yeah 875 grand in taxes And you

might think that's well it's a millionaire Who cares Well

what if your grandpa and you worked really hard Your

whole life with your orthodontic practice saved your money and

you were careful on vacations You had $1,000,000 saved in

that IRA and now it's only 12 and 1/2 cents

on the dollar How do you feel So yes it's

applies only to quote rich unquote people but the amount

of tax the government takes his massive So it should

be pretty understandable that lots and lots and lots of

money is spent on very fancy lawyers setting up all

kinds of flavors of trusts revokable in year So that

all those years Grandpa spent inventing and patenting industrial solvents

to really stick braces to your teeth they're didn't all

just goto pay for some congressman's mistresses Facials Why does

all this matter so much in the form of an

irrevocable trust Well because if the trust was revokable none

of the tax shelters would in fact apply So yeah

that's the big diff between revokable on here Revokable Trust

your irrevocable It's done And then you get the tax

kiss There A tax free pass Okay You can go

back to eating your pace now Johnny There maybe try

the pumpkin spice Good luck with that You'll need your 00:05:21.2 --> [endTime] money