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Irrevocable Trust

Irrevocable Trust

Irrevocable Trust: Understanding the Benefits and Drawbacks

An irrevocable trust is a type of estate planning tool that can provide several benefits for individuals who wish to protect their assets and control the distribution of their wealth after they pass away. In this article, we will provide an overview of what an irrevocable trust is, how it works, and the benefits and drawbacks of using this type of trust.

What is an Irrevocable Trust?

An irrevocable trust is a legal entity created by an individual, referred to as the grantor, to hold assets for the benefit of one or more beneficiaries. Once created, the trust cannot be changed or revoked by the grantor without the consent of all beneficiaries. The trustee, selected by the grantor, manages the assets in accordance with the terms of the trust agreement.

How Does an Irrevocable Trust Work?

An irrevocable trust works by transferring ownership of assets from the grantor to the trust. The grantor no longer owns or controls the assets, which are managed by the trustee for the benefit of the beneficiaries. The trust agreement sets out the terms and conditions of the trust, including how and when the assets will be distributed to the beneficiaries.

Benefits of an Irrevocable Trust

There are several benefits to using an irrevocable trust, including:

Asset protection: By transferring ownership of assets to an irrevocable trust, they are protected from creditors and potential legal claims.

Estate tax minimization: Assets held in an irrevocable trust are not included in the grantor’s estate for tax purposes, which can help to minimize estate tax liabilities for beneficiaries.

Control and distribution: The grantor can still maintain control over how and when the assets are distributed to beneficiaries after their death, even though they no longer technically own the assets.

Privacy: An irrevocable trust is a private document and does not need to be made public, unlike a will which must go through probate and become part of the public record.

Drawbacks of an Irrevocable Trust

There are also some potential drawbacks to consider when creating an irrevocable trust, including:

Loss of control: Once assets are transferred to an irrevocable trust, the grantor no longer owns or controls them and cannot change the terms of the trust without the consent of all beneficiaries.

Potential tax consequences: Depending on the type of trust and the assets held within it, there may be tax implications and other financial considerations to take into account.

Legal and administrative costs: The creation and administration of an irrevocable trust can be complex and expensive, requiring the assistance of legal and financial professionals.

In conclusion, an irrevocable trust can be a valuable estate planning tool for individuals looking to protect their assets and control the distribution of their wealth after they pass away. However, it is essential to understand the benefits and drawbacks of using this type of trust before making any decisions. Working with a qualified attorney or financial advisor can help you determine the best approach for your unique needs and circumstances.

An irrevocable trust is a non-testamentary document that is created, in lieu or in conjunction, with a will.  Irrevocable trusts are those trust that may not be re-claimed by the creator, or settlor, of the trust.  Once property; or in legal terminology, res, is included in a trust it may no longer be re-acquired by the settlor.

Revocable trusts can also become irrevocable upon the death of the settlor.  Once a settlor dies he, or she, can no longer access the trust assets and, by definition, the revocable trust becomes an irrevocable trust.

There are a set of requirements in the creation of an irrevocable trust.  First, the trust must have a settlor.  This is the individual who creates the trust and puts assets into it.  The settlor must have the intent to make an irrevocable trust.  Courts will scrutinize irrevocable trusts to determine whether the settlor’s true intention was to make an irrevocable trust, a revocable trust or a will.

There must also be delivery of the irrevocable trust to the trustee.  The trustee is the manager of the trust.  It is usually an attorney or a financial institution that manages and invests assets.  The delivery requirement is very specific; intent is not a valid defense.  If you are on your way to deliver your finalized trust to your trustee and you die on route the trust will be invalid.

Every trust, whether revocable or irrevocable must contain property, or res.  By law, you are not permitted to create an irrevocable trust for the disposition of future assets.  The amount of assets that are required in a trust for it to be valid depends entirely on State law.

An irrevocable trust also requires known beneficiaries.  A irrevocable trust must have specifically named beneficiaries.  For example, you can designate the beneficiary of your trust to be Steve Lyons, but you cannot designate “my best friend and his issue” as your trust beneficiary.

Irrevocable trusts, unlike revocable trusts, are used as a way to avoid estate taxes.  Once a settlor places assets into a trust they no longer become the property of the settlor.  From that point on they are the property of the trustee for the benefit of the beneficiaries.  As such, any amount that the settlor puts into the trust can not be used to calculate estate taxes.

Irrevocable trusts are also a great way to avoid creditors.  Just as in the estate tax example, the assets of the irrevocable trust are not the property of the settlor but of the trustee.  This is distinguished from revocable trusts.  In revocable trusts the settlor has the right to re-enter the trust and retrieve assets.  As such, since the assets are still accessible to the settlor it is policy that they also be accessible to creditors, including the government.

You do not need to be the settlor of an irrevocable trust in order to put assets into the  irrevocable trust.  Any individual is permitted to give property to a pre-existing trust.  The individual is not permitted to designate different beneficiaries.  When someone adds to a trust the assets will be distributed, at the time and method specified, to the beneficiaries of the initial trust agreement.