What You Should Know about an Irrevocable Trust

August 1, 2016

irrevocable trustThere are many types of estate planning tools, including various types of trusts.  Irrevocable trusts are different from revocable ones.  To be “irrevocable” means to be immune to change.  So, by design, an irrevocable trust is one that cannot be amended, modified, changed or revoked.  Once it has been properly created, you can consider the written terms of the trust agreement to be written in stone.  With few exceptions, the terms cannot be changed in the future.

Different kinds of Irrevocable Trusts

There are two types of irrevocable trusts: irrevocable living trusts and testamentary trusts.  They both serve different purposes.  An irrevocable living trust, also referred to as an “inter vivos irrevocable trust,” is created and funded by someone who is still living.  A few examples of irrevocable living trusts include:

  • Irrevocable Life Insurance Trusts
  • Qualified Personal Residence Trusts
  • Grantor Retained Annuity Trusts
  • Spousal Lifetime Access Trusts
  • Charitable Remainder Trusts

However, a testamentary trust is created and funded after someone’s death.  This means that no one who is still living has any legal authority to change the terms of the trust.  Therefore, virtually all testamentary trusts are irrevocable.

Is there any way to change an irrevocable trust?

Since an irrevocable trust is specifically designed so that it cannot be changed or revoked, the basic rule is no changes can be made once created.  However, there are a few options to consider if there is an issue with the terms.
Some irrevocable trusts include instructions to the trustees or beneficiaries specifically allowing for the terms to be modified under very specific and limited circumstances. On example is typically seen in Charitable Trusts, which usually contain provisions to allow modification of the trust agreement to comply with changes in federal law.
Judicial modification can also be an option when, for instance, circumstances have changed so that the administration of the trust has become too expensive.  The trustee and/or trust beneficiaries can request that the terms of the trust be modified or that the trust be completely terminated through a court proceeding.
Recently, many states have adopted legislation to allow for "decanting."  Wine lovers know that the term “decant” means to pour wine from one container into another in order to open up the aromas and flavors of the wine.  In the world of irrevocable trusts “decant” means the legal process through which the trustee appoints or distributes trust property in further trust for the benefit of one or more of the beneficiaries.  In other words, the trustee transfers some or all of the property held in an existing trust into a brand new trust with different and more favorable terms.

Which type of trust can provide asset protection?

Protection from creditors can be accomplished only with an irrevocable trust.  “Irrevocable” means the trust cannot be changed once it is created.  Since you no longer control the property, and it cannot be revoked, the money is no longer considered to be yours.  As such, that property is no longer subject to your creditors.

What are the proper terms to include for asset protection?

As with anything else you want to accomplish, the provisions in a trust are essential to ensure asset protection.  First of all, the interest you leave to your beneficiary must either be contingent on some future event, or be subject to the sole discretion of the trustee.

What is the difference between a revocable and an irrevocable living trust?

The general purpose of a revocable living trust is to avoid the expense and delay of guardianship and the probate process.  Typically, a revocable living trust is used along with a will in estate planning.  Property in a trust can be distributed upon your death without court approval.

A Revocable Living Trust is subject to creditors

A revocable living trust cannot provide protection for your assets because the property in the trust is still considered to belong to you.   You are named as the trustee so you will still have control over the trust assets during your lifetime.  Since the property is essentially yours, it remains subject to the claims of your creditors.
Another reason that a revocable living trust does not protect your assets is because you have the power to revoke the trust at any time.  If you do, the trust property immediately becomes yours once again.  Also, all of the income your trust assets may generate belongs to you and must be reported on your personal income tax return.  All of those characteristics of a revocable trust make it poor for protecting assets.
Download our FREE estate planning worksheet!  If you have questions regarding an irrevocable trust, or any other estate planning needs, please contact Anderson, Dorn & Rader, Ltd., either online or by calling us at (775) 823-9455.

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