Irrevocable Trusts

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.

What is an Irrevocable Trust?

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 This permanent status differs from a Revocable Trust, designed specifically for being withdrawn at any time.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.

How To Set up an Irrevocable Trust?

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.

What Are the Advantages of an Irrevocable Trust?

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.

What Is a Trust Reformation?

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.

What are the Types of Irrevocable Trusts?

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.

Spousal Lifetime Access Trust (SLAT): A SLAT is an Irrevocable Trust used typically by married couples to provide asset protection and tax planning for a spouse and descendants.
Irrevocable Life Insurance Trust (ILIT): An ILIT is an Irrevocable Trust used to remove life insurance from the Grantor’s probate and taxable estate.
Disclaimer Trust: Usually used in a Will, a Disclaimer Trust refers to a protective trust for a surviving spouse funded with assets that the surviving spouse could have taken outright, but instead “disclaimed.” The Will’s terms then dictate that these disclaimed assets pour into the “Disclaimer Trust.”
Dynasty Trust: A Dynasty Trust is designed to last forever, sheltering assets from generation to generation from divorce, lawsuits, and various taxes. Typically these trusts are used by clients who wish assets to remain within and benefit only their descendants.
Grantor Trust: or “Intentionally Defective Grantor Trust” is an Irrevocable Trust technique where the Grantor has given away the asset to the trust, but the Grantor still pays the income taxes due on the trust assets. This shifting of income tax burden allows the Grantor to make an additional gift to the trust each year, but the IRS views it as a penalty, not gift.
Grantor Retained Annuity Trust (GRAT): GRAT planning involves the Grantor giving assets to an Irrevocable Trust but getting back an annuity. Typically done to shift assets to descendants, the goal is to transfer assets without triggering Gift Tax recognition.
Qualified Domestic Trust (QDOT): Used when one spouse is not a US citizen. The QDOT allows the US Citizen spouse to leave assets for the non-citizen spouse’s care without triggering taxes.
Qualified Personal Resident Trust (QPRT): Parents often use a QPRT to transfer a home to descendants at a low gift tax value. The Grantor gives the home to the Irrevocable Trust but receives back the right to the home’s rent-free use.
Education Trusts: Education Trust refers to an Irrevocable Trust created to distribute assets only for the beneficiaries’ education. Typically designed for the Grantor’s descendants.
Charitable Remainder Annuity Trust (CRAT): A CRAT is an Irrevocable Trust used in charitable estate planning where the Grantor gives the Irrevocable Trust an asset but receives back a fixed annuity payment.
Charitable Remainder Uni Trust (CRUT): A CRUT is an Irrevocable Trust used in charitable estate planning where the Grantor gives the Irrevocable Trust an asset but receives back an annuity payment that is tied to the assets fair market value rather than a fixed annual amount.
UniTrust: A UniTrust refers to an Irrevocable Trust that distributes assets to the beneficiary based on a percentage of the net assets in the trust on a given date. Rather than giving the beneficiary “all income” which can vary from year to year or even be zero, a UniTrust gives the beneficiary an amount every year even if there is no income.
Bypass Trust: A Bypass Trust is a technique that shelters the first spouse’s estate tax exemption. Typically the surviving spouse has access to the funds but at the surviving spouse’s death the remaining assets “bypass” that spouse’s estate and pass estate tax-free for descendants.
Credit Shelter Trust: A Credit Shelter Trust is a technique where the deceased spouse’s estate and generation skipping tax exemption is “sheltered” and preserved. Typically, the surviving spouse has access to the trust funds, but at the surviving spouse’s death, the remaining assets pass to descendants free of estate and generation-skipping taxes.
Marital Trusts: A Marital Trust is typically used along with a Bypass or Credit Shelter Trust to hold the portion of the deceased spouse’s assets that exceed the death tax credit. The assets are held for the surviving spouse sheltered from creditors or future spouses but are part of that spouse’s taxable estate. If drafted properly the trust qualifies as part of the “Marital” exemption, hence the name.
AB Trust: An AB Trust or AB Trust is a combination of a Credit Shelter Trust (the “A” Trust) and a Marital Trust (the “B” Trust). These trusts are used by married couples to shelter all of the deceased spouse’s assets in protective trusts but keeping the tax-exempt assets separate from the assets which are not tax exempt at the first spouse’s death.
Pet Trust: Under the Pennsylvania statutes, a pet trust is called an animal trust. The trust allows you to plan for the care of your pet if you pass away. The trust also covers any pets that may be in gestation at the time of your death. By creating a trust for your pet, you are ensuring they maintain as close to a normal life as possible.

Advising and Representing Trustees

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.

Why a Trustee Needs a Lawyer

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:

Formal Accountings
Surcharge Actions
Breach of Fiduciary Duty for information about Trustee duties
Removal of Trustees
Trust Litigation

Typical Estate Questions About Irrevocable Trusts:

Here are some common questions clients, beneficiaries, and Trustees ask:

Do I need a Trust?

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.

Can I use a Life Insurance Policy for a Trust?

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.

Is it expensive to have a bank or trust company be a Trustee of a Trust?

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.

What is a Protector?

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.

What are the advantages of having a Trust Protector?

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:

Trustees will be more likely return your calls faster, as they can be easily removed.
If the Trustee becomes incapacitated, inattentive, involved in a dispute with a beneficiary or otherwise problematic, the Trustee may be removed quickly and inexpensively.
The Protector can act as a form of communication between a Trustee and beneficiaries and avoid needless litigation.
The Protector can obtain data from a Trustee that might otherwise not be released.
The Protector can have other powers, which allow them to address changes in the law, circumstances and the tax code.

How are banks paid to be Trustees?

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.

Who pays the bank after I am dead to be a Trustee of the Trust?

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.

What happens if the person I leave something to in an Irrevocable Trust dies before me?

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.

What is an Irrevocable Living Trust?

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.

What is a Revocable vs. Irrevocable Trust?

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.

Irrevocable Trust Medicaid Planning

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.

What does Irrevocable Mean?

Irrevocable means that the Trust cannot be “revoked,” meaning it cannot be closed down by the Grantor.

What is a Trust Beneficiary?

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.

What is a Trust Contingent Beneficiary?

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.

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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.

Peter Klenk is the founding member of Klenk Law, a seven attorney boutique estate planning law firm. We serve clients in Pennsylvania, New Jersey, New York, Minnesota and Florida. Peter Klenk received his Masters in Taxation LL.M. from NYU Law School and his J.D. from the University of Minnesota Law School. He served his country in the Navy JAGC during Desert Storm. Easy to talk to, feel free to call Peter for an appointment. We will make the process as easy as possible!

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Irrevocable Trusts: Everything You Need to Know