IN THE JULY 2020 ISSUE OF SISTAH’S PLACE MAGAZINE, I CONTINUE THE REVIEW OF THE ESSENTIAL ESTATE PLANNING DOCUMENTS BY DISCUSSING THE BASICS OF A IRREVOCABLE TRUST.
SISTAH’S PLACE MAGAZINE CELEBRATES WOMEN HAVING AN IMPACT THROUGH ENTERTAINMENT, INSPIRATION, AND EMPOWERMENT. GET YOUR COPY HERE.
What Is A Trust? (Part 2)
In the past three issues, we have been looking at what I consider essential estate planning documents, specifically wills, powers of attorney, and living trusts. In last month’s issue, we discussed our first type of living trust, a revocable trust. In this issue, we will discuss our second type of living trust, an irrevocable trust. To recap a living trust is a legal agreement between two parties, like a contract. One person creates the trust and the other person agrees to manage the trust based on the rules established by the trust creator for the benefit of a beneficiary. The trust creator is known as the grantor, trustor, or settlor, the person that manages the trust is known as the trustee and the person that benefits from the trust is known as the beneficiary. When referring to the trust creator I will use the term grantor.
How Is a Trust Created?
The grantor decides in writing how certain assets should be managed and who shall benefit from the assets; this is the trust document. Next, the grantor transfers ownership of those assets into the name of the trust; this is considered funding the trust. The trustee accepts the assets and agrees to manage the assets based on the terms of the trust for the benefit of the beneficiary.
Why Is It Called a Living Trust?
A trust is considered a living trust because it takes effect during the grantor’s lifetime. There are two types of living trusts, revocable trusts and irrevocable trusts. Although they are created the same the trust language dictates the differences concerning who can manage the trust, who can benefit from the trust and whether the trust can be changed or terminated. This article will focus on irrevocable trusts. (For a discussion on revocable trusts look at Sistah’s Place April 2020, issue.)
What Makes A Trust Irrevocable?
Just as the name implies, an irrevocable trust does not allow the grantor to amend or change the terms of the trust for any reason once it is created nor can the grantor act as trustee. Essentially, she forfeits all access to and control over all assets placed in the trust.
What Is the Purpose of an Irrevocable Trust?
An irrevocable trust is an excellent estate planning tool allowing the grantor certain protections. When assets are transferred into the trust and retitled or registered into the name of the trust the assets are removed from the grantor’s estate. Once removed they are no longer subject to estate taxes, are not considered when determining eligibility for Medicaid, Medicare and Supplemental Security Income, nor are they considered in determining assets to pay a creditor or judgment from a lawsuit or legal action. Giving up complete control of the assets allows the trust to be considered a separate tax entity from the grantor, solely managed by the trustee. The grantor can also, maintain her privacy by avoiding probate which will eliminate court fees.
(Warning: An Irrevocable trust should not be funded while the grantor is defending a lawsuit or is anticipating defending a lawsuit. The court may determine that the transfer was made to keep the assets out of the reach of the judgment holder. This is fraudulent and the court will likely overturn the trust arrangement.)
Can You Undo an Irrevocable Trust?
There are legal options in place which allow beneficiaries to undo an irrevocable trust under certain circumstances. One option is unanimous consent if all the beneficiaries are at the age of majority. A second option is to petition the court to decant the trust. If decanting is allowed the original trust’s assets are transferred to a newly created trust with up-to-date terms. The third option is for the grantor to include language in the original trust granting the trustee the power to adjust the trust for unforeseen circumstances.
Final Thoughts.
There are several different commonly used irrevocable trusts that may be appropriate for your unique needs. Remember trusts are not just for the extremely wealthy. They are excellent estate planning tools that can address many issues. Through foresight and planning, an irrevocable trust can ensure that your estate assets are preserved for those you love after you are gone, your beneficiaries.
