One of the most valuable estate planning tools is the irrevocable trust. The phrase “irrevocable trust” refers to a type of trust that cannot be modified or terminated without a specific condition or term being fulfilled or without the permission of a named beneficiary. Also in the case of an irrevocable trust, once an individual (called a “settlor” or a “donor”) transfer property into the trust, the individual’s ownership of the property is effectively removed and the trust becomes owner of the property. In the event that an individual decides to create an irrevocable trust, it can be extremely wise idea to consult with a knowledgeable and seasoned attorney about the matter. This entry will examine some basic information concerning irrevocable trusts in the Commonwealth of Massachusetts.
How an Irrevocable Trust Works An irrevocable trust can be created during the life of an individual or upon death. Irrevocable trusts involve three individuals: the individual who creates the trust (“settlor” or “donor”), the party who manages the trusts (“trustee”), and the individual or individuals who receive property, income or in-kind payments from the trust (“beneficiaries”). An irrevocable trusts is established from a document that clearly delineates how assets and/or income will be managed and distributed. An estate planning attorney can prove essential in drafting these terms of an irrevocable trust.
Irrevocable Trusts Allow Individuals to Avoid Probate An irrevocable trust protects an individual’s assets and property from the probate process. Instead, the assets or property of the trust will be managed by another individual and the assets will later be distributed to individuals who are named in the trust as beneficiaries. As a result, irrevocable trusts offer the opportunity to reduce the time and expense associated with the probate process.
The Limitations of an Irrevocable Trust Irrevocable trusts are not without some potential limitations. Most importantly, parties must understand that assets transferred to an irrevocable trust cannot be removed or given back in the event that an individual changes plans for the irrevocable trust. As a result, an individual loses control over assets once transferred to an irrevocable trust. An irrevocable trust also comes with certain tax considerations that may require more complicated IRS filing.
Irrevocable Trusts Allow Property Management By Outside Individuals An irrevocable trust offers the opportunity for property to be managed by an outside individual or company, which can greatly decrease stressful situations for the individual who drafts the irrevocable trust. One of the situations in which this type of management device becomes beneficial is situations in which the individual becomes incapacitated.
Reasons Why Parties Decide To Use Irrevocable Trusts There are two primary reasons why individuals decide to use irrevocable trusts: taxes and creditors. “Revocable” trusts also keep assets outside of a probate estate, but these assets still remain subject to taxation and potential creditor claims, which may include nursing home, Medicaid, credit cards and divorcing spouses of the individuals creating a revocable trust. Any assets included in a revocable trust also remain part of a taxable estate. Irrevocable trusts, on the other hand, can help minimize an individual’s tax burden while maximizing the benefits to named beneficiaries.
Why would anyone part with control of his assets and rely on someone else to control his money? The only time you might want to consider creating an irrevocable trust is when you want to (1) minimize estate taxes, (2) become eligible for government programs, and (3) protect your assets from your creditors.
The document creating the trust doesn't meet the legal requirements; The trust was created or modified by fraud; The creator of the trust lacked the capacity to create the trust; or. Someone exercised undue influence over the creator of the trust.
Also, an irrevocable trust's terms cannot be changed, and the trust cannot be canceled without the approval of the grantor and the beneficiaries, or a court order. Because the assets within the trust are no longer the property of the trustor, a creditor cannot come after them to satisfy debts of the trustor.
Conventional lenders, such as banks and credit unions, are reluctant (or in most cases unable) to offer loans to irrevocable trusts in California. This reluctance is partly due to the complexity, lack of personal guarantee, as well as the hassle to set up this loan.
While it is true that the Settlor of an irrevocable trust cannot make changes to or terminate the trust once the trust is established, it may be possible for the beneficiaries, Trustee, or a court to modify or terminate an irrevocable trust in California.
An intentionally defective trust is an irrevocable trust that has the following characteristics: (1) transfers of property to the trust are considered completed gifts for federal gift and estate tax purposes, (2) property in the trust will not be includable in the gross estate of the grantor (the creator of the trust) ...
With an irrevocable trust, the transfer of assets is permanent. So once the trust is created and assets are transferred, they generally can't be taken out again. You can still act as the trustee but you'd be limited to withdrawing money only on an as-needed basis to cover necessary expenses.
The grantor forfeits ownership and authority over the trust and its assets, meaning they're unable to make any changes without permission from the beneficiary or a court order. A third-party member, called a trustee, is responsible for managing and overseeing an irrevocable trust.
For lawsuit-proof wealth, you need an irrevocable trust or another protective entity. Since you cannot revoke or change an irrevocable trust, your creditors have no greater power to unwind your trust and reclaim its assets. But for an irrevocable trust to protect you, it must be presently funded.
If you want to protect assets with a trust, some irrevocable trusts will do the trick. When you put money in an irrevocable trust—one you don't control and can't revoke—then the money probably won't be considered yours anymore, and it won't be available to creditors.
Revocable trusts offer benefits such as the ability to be easily amended, saving time and money by avoiding probate court, while irrevocable trusts offer the benefit of minimizing estate taxes and protecting assets from creditors.
After the grantor of an irrevocable trust dies, the trust continues to exist until the successor trustee distributes all the assets. The successor trustee is also responsible for managing the assets left to a minor, with the assets going into the child's sub-trust.
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