Irrevocable Trusts are an essential part of estate planning, asset protection, and tax avoidance planning. Once only a tool for the wealthy and powerful, Irrevocable Trusts, and the protection they provide, are now available to everyone. Because mastering their use take time, many estate planners do not use Irrevocable Trusts. Avoiding trusts as an estate planning tool is a mistake, as these flexible tools can be a useful part of almost everyone’s estate plan.
An Irrevocable Trust is a trust created by the Grantor making it impossible to “revoke” the trust and bring the assets back into his name. This permanent status differs from a Revocable Trust, designed specifically for being withdrawn at any time. Once the Grantor gives an asset to the Irrevocable Trust, the asset belongs to the trust. At its most basic level, Asset Protection and Estate Planning with an Irrevocable Trust stems from this fact: if properly drafted a person can give assets to an Irrevocable Trust and his future creditors cannot take that asset. The Grantor no longer owns the asset; the Trust owns the asset.
Each Irrevocable Trust must have a Grantor, who is the person who signs the trust and brings it into existence. The trust is only a piece of paper, so the trust terms must appoint an individual or entity who will implement the trust’s terms; this person is called the Trustee. Once signed, the Grantor or other people may give the trust assets which the Trustee manages for the Beneficiaries.
An Irrevocable Trust is a primary tool in most Asset Protection and Estate Plans. The trusts can own almost any asset while providing shelter from the Grantor’s and Beneficiary’s divorce, creditors and legal problems. The trust can help keep assets in the family and, if a jurisdiction like Pennsylvania or New Jersey has revoked the Rule Against Perpetuities, can last forever. This flexible tool allows Grantors to provide benefits for generations. These valuable benefits arise because once the Grantor transfers ownership of an asset to the trust, he has surrendered all incidents of ownership over that asset. It is the trust’s asset now, not the Grantor’s. The transfer can also remove the asset from the Grantor’s taxable estate, avoiding death taxes and shifting the income tax burden away from the Grantor.
Though a trust might be an Irrevocable Trust, the facts and circumstances might allow for modification. A Trust Reformation refers to the process of making a change to an Irrevocable Trust. Learn More HERE.
There is no “one size fits all” Irrevocable Trust. Irrevocable Trusts are flexible tools that can be modified to fit many situations and address many needs. I would be happy to talk to you about your particular circumstances and brainstorm with you about what trust best fits your needs. Below is a list of some of the Irrevocable Trusts we regularly use, with a link to more detailed information on each.
Trustees of Irrevocable Trusts owe beneficiaries a fiduciary duty. If the beneficiaries believe that any action taken by the Trustee has harmed them, they are free to petition the court to review any and all actions seeking to surcharge the Trustee. If surcharged, the Trustee must pay the damages from the Trustee’s funds.
Almost every Irrevocable Trust allows the Trustee to hire a lawyer to advise and represent the Trustee. Professional Trustees retain in-house attorneys for this purpose and then supplement these attorneys with outside Estate Litigation Lawyers. Professional Trustees seek legal help because professional Trustees know this is a wise decision. Sound, legal advice from experienced Trust Lawyers helps avoid conflict and minimize the chances of litigation. Further, it helps reduce the chance that the Trustee will make a mistake causing personal liability.
For more information go to our Estate Litigation page to learn more about:
Here are some common questions clients, beneficiaries, and Trustees ask:
While an Irrevocable Trust is never a legal requirement, they have many advantages. A careful analysis of your assets, goals and your heirs’ needs is the only way to judge if a trust is right for you.
Irrevocable Life Insurance Trusts, or ILITs, are specifically designed to hold life insurance. Life insurance is a flexible, estate planning tool, and can be used in conjunction with many Irrevocable Trusts. For example, an excellent plan for avoiding conflict in a Second Marriage or Blended Family is purchasing life insurance to fund trusts so your spouse and children from prior relationships can part on good terms. Further, life insurance in Irrevocable Trusts is often critical components in Business Succession Planning.
A “Corporate Trustee” is a bank or trust company serving as trustee. Corporate Trustees have fee schedules available on request. Typically, the Corporate Trustee charges a percentage of the trust’s assets’ fair market value; such as 1.5%. For more information, see our section on Fiduciary Fees. When you ask if the cost is expensive, you have to balance the need for a Corporate Trustee with the services provided. If a no family member is qualified, a Corporate Trustee is an excellent alternative. Further, an interested person can always challenge a fee and have the court review fees. See Fee Disputes. Always balance a Corporate Trustee’s power by appointing a responsible Protector team.
In a Trust, a Protector is a person appointed to oversee the trustee. A Trust Protector may be granted many powers, but typically has the power to remove and replace the trustee without the use of courts or lawyers.
An Irrevocable Trust is, Irrevocable. If you appoint a person or institution as trustee and later regret that decision, your options to remove and replace that trustee are limited and expensive. If you include a Protector in the trust:
Banks and Trusts companies typically charge a percentage of the trust’s value each year. Corporate Trustees provide these fee schedules on request and sometimes publish them on websites. For more information, see our Fiduciary Fees article.
Once the bank assumes the trusteeship, they are authorized to pay themselves from trust assets. This is why the trust should balance the bank’s power by appointing a strong Protector team. Learn more about bank trustee fees in our Fiduciary Fees article.
A well drafted Irrevocable Trust clearly states where assets pass when a beneficiary dies. A good Estate Planning Lawyer asks you what result you wish, and drafts the trust accordingly.
For example, if a Bucks County, Pennsylvania client wants me to form an Irrevocable Third Person Special Needs Trust for her grandson in Atlantic County, New Jersey, I will ask her what should happen to any unused funds at the grandson’s death. She may say, any such funds should pass to charity or perhaps in further trust to her other grandchildren in Philadelphia. Whatever her wish, I will then incorporate those terms into the trust. At the grandson’s death, the trustee follows the trust’s terms.
There is no such thing as an Irrevocable Living Trust. This is a combination of Revocable Living Trust and Irrevocable Trust. A “Living Trust” is a Trust that can be modified and revoked. To learn more about Revocable Living Trusts, see my articles.
Simply put, the Grantor cannot revoke an Irrevocable Trust while he can revoke a Revocable Trust. These two trust groups have different Estate Planning and Asset Protection purposes.
An Irrevocable Trust can be useful for Medicaid Planning. In short, the grantor can form a trust, transfer assets into the trust and then wait out the Medicaid look-back period. Once past, the grantor can apply for Medicaid while the property remains safely in the Irrevocable Trust, sheltered from children’s divorce and creditors. Using Irrevocable Trusts in Medicaid planning is complex. Only attempt such planning after a thorough Estate Planning Lawyer’s analysis.
Irrevocable means that the Trust cannot be “revoked,” meaning it cannot be closed down by the Grantor.
A Trust Beneficiary is a person or entity entitled to receive benefits from a trust.
For example, if a Philadelphia resident executed an Irrevocable Trust naming his brother, also a Philadelphia resident, as trustee with instructions to give ½ the income generated each year to a nephew and ½ to his church, the nephew and church would be the Beneficiaries of the Philadelphia situs Trust.
A Contingent Beneficiary is a person or entity entitled to receive benefits from a trust, dependent on a contingency.
For example, if Uncle Bob executed an Irrevocable Trust naming his brother as trustee with instructions to give $10,000 each year to a nephew. At the nephew’s death, the remainder passes to Uncle Bob’s church. The church is the contingent beneficiary. The church receives the trust funds contingent on anything remaining at the nephew’s death.
If you have any questions about Irrevocable Trusts or other estate planning topics, please contact our office to schedule a free consultation. For more than two decades Klenk Law has focused only on Estate Law. We’ve seen it all, and this experience allows us to explain complex estate planning techniques clearly and concisely. We make it easy for you to understand Irrevocable Trusts and Estate Planning so you can make the best decisions for yourself and your family.
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