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IRREVOCABLE TRUSTS
GENERALLY
An irrevocable trust normally
transfers assets from its owner, the Grantor, to another
party(s), the trustee(s), for safekeeping and management
according to the Grantor’s instructions. However, unlike a
revocable trust, the Grantor should not designate himself or
herself as trustee. As the name implies, an irrevocable trust is
permanent, and the trust normally cannot be later amended or
revoked at the election of the Grantor. Furthermore, once assets
are transferred by a Grantor into an irrevocable trust, such
assets are normally no longer considered the property of the
Grantor. The remainder of this article will assume (i) the
Grantor is not the trustee, (ii) the Grantor retains no power to
amend or revoke the trust, and (iii) the trust assets are not
considered the property of the Grantor.
Tax Considerations
There are potential gift tax
consequences at the time a transfer is made by the Grantor to
the irrevocable trust. Once assets are transferred to the trust,
the Grantor can no longer exercise control over them, and they
are no longer considered to belong to the Grantor for tax
purposes. Accordingly, the income generated by trust assets is
either taxed annually to the trust, or to the beneficiaries of
the trust (under certain circumstances). An irrevocable trust,
if properly set up and funded, will not be included in the
Grantor’s estate for federal estate tax purposes following the
death of the Grantor.
Probate Considerations
A transfer of assets into an
irrevocable trust creates a permanent change in ownership and
control over those assets. The assets now belong to the trust.
The assets in the trust will not be subject to probate following
the death of the Grantor. This avoids the expense of probate,
and delays in the transfer of property traditionally
attributable to probate administration.
Privacy Considerations
As with a revocable trust, the
value of the trust, as well as the identity of the
beneficiaries, is not ascertainable by the public (absent
litigation, or the terms of the trust requiring or allowing
identification). This is to be contrasted with probate, in which
various information is open to the public.
Change in Circumstances
An irrevocable trust can be used
to achieve many asset management goals. However, an irrevocable
trust is static, in that once the trust is established, it can
never be altered to accommodate change in circumstances of the
Grantor or beneficiary. The trustee is bound to adhere to the
terms of the trust instrument, regardless of the subsequent
wishes of the Grantor. This is an important consideration to
keep in mind when deciding whether an irrevocable trust is the
proper tool to achieve desired results.
OPTING FOR AN IRREVOCABLE
TRUST
In order for an irrevocable trust
to achieve the desired effects, it must be drafted precisely in
accordance with applicable statutory provisions. The permanency
of an irrevocable trust must always be kept in mind. |
