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There are two main types of trusts to choose from when estate planning: revocable and irrevocable. While a revocable trust is most commonly used, an irrevocable trust has benefits that make it worth considering and discussing with an estate planning attorney.
What Is an Irrevocable Trust?
An irrevocable trust is a trust established and implemented during the life of the trustor. Irrevocable trusts are permanent and the property is no longer in the possession of the trustor once the trust is funded. Basically, an irrevocable trust cannot be revoked or undone like a standard or testamentary trust. The property is no longer considered to be in the possession of the original owner, but rather owned by the trust and cared for by a trustee.
This type of trust is not right for everyone. If a person wants to remain in possession of their property until death, this is certainly not an option. However, for those with disposable assets such as extra real property, large portfolios, or even large collections, this option can work to their advantage. There are five specific advantages to an irrevocable trust that are worth considering:
When establishing a standard trust, a major concern is that it will not run properly after death - after someone is no longer there to confirm legality. Estate planning attorneys even carry liability insurance on their malpractice policy in response to this concern. But when working with an irrevocable trust, this concern does not come into play. The trust is created and the property transferred while the original donors are still alive. Best of all, the donors have the ability to supervise and evaluate the current trustee and ensure that their assets are in good hands.
Not every trust is automatically private. Should a trust be created through a will or only go into effect upon the donor’s death, those assets will still go through probate. This means that before anything is placed into the trust, a judge will review the documents and endorse the process. All the while, funds are being used to pay for the proceedings. Additionally, should anyone challenge the legitimacy of a trust, the entire trust could be canceled. With an irrevocable trust, the law sees the property as no longer belonging to the actual owners. The courts cannot touch or even see the property upon the death of the donors.
It's an established legal precedent that most trusts are formed to protect and slowly distribute wealth. While this is an amiable goal, it is not guaranteed with a revocable trust. In fact, unless there are very specific provisions in place, the beneficiaries can cancel the trust at any time with the court’s approval and agreement from all of the beneficiaries. However, with an irrevocable trust, it typically cannot be revoked until an established time within the trust documents.
Sometimes family conflicts can arise with the death of a loved one. This is especially seen when trusts established by a will are not what surviving loved ones anticipated; perhaps money is distributed in a way not in-line with everyone's wishes. Commonly-challenged trusts even include trusts established for charitable donations. By establishing an irrevocable trust, the only people who will ever be privy to the trust’s existence are the original parties. For those who want to give a significant amount of their money to charity, it can be done without the risk of any beneficiaries finding out and taking offense.
Another primary reason for establishing a trust is to avoid excessive taxation. Under current IRS law, the only trusts that actually avoid estate taxes are irrevocable trusts. The reason is that irrevocable trust property no longer belongs to the original trustor at death. No ownership means no liability. This is especially useful for couples with estates that are higher than the current IRS limits. There are still taxes paid on the trust property, but those taxes are paid by the trustor at the time of deposit into the trust and the actual tax value typically comes out to between 10 and 20 percent of what would have otherwise been paid.
One common concern about irrevocable trusts is that the property may be necessary during the latter part of the person’s life to pay for medical expenses. An irrevocable trust does not prevent the trustor from gaining the benefit of the items, simply controlling the ownership. In fact, one of the most popular irrevocable trusts is a spousal care trust, which is set up to care for the needs of the widowed after the first spouse dies, without being considered part of that spouse’s estate. Simply put, the trustor may not be the trustee of the trust, but he can be a beneficiary.