How Does an Irrevocable Trust Work?

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As a legal agreement that is set up differently than a will, a trust details how you want your assets distributed to your beneficiaries. Let’s learn how an irrevocable trust works and how you can use it to your advantage.

The grantor of a revocable trust has the legal power to change one or more terms, such as the names of the beneficiaries and which assets get distributed according to a timeline.

An irrevocable trust cannot be changed, expanded, or canceled except under a limited number of circumstances. Because of the legal restrictions that guide the formation of an irrevocable trust, setting one up to protect assets might not be a good idea because it prevents the sale of assets to address financial issues.

Despite the lack of liquidity, irrevocable trusts offer a few benefits for people who have accumulated a considerable amount of wealth.

Creating an Irrevocable Trust

Opening an irrevocable trust starts with the naming of a trustee and beneficiary. The trustee of an irrevocable trust manages the trust and can be named a beneficiary, but not the grantor. Beneficiaries consist of friends, relatives, and organizations that receive assets from the trust. Once again, a beneficiary cannot be the grantor of an irrevocable trust.

When a grantor transfers assets into an irrevocable trust, the grantor loses control of the assets. The grantor no longer holds legal possession of the assets, which means the assets do not have any impact on the grantor’s wealth, tax liability, or value of an estate.

Advantages of an Irrevocable Trust

The tax advantages of an irrevocable trust make it a popular financial strategy to protect the value of assets. Another advantage is the grantor defines the terms for how each beneficiary receives the specified assets that are protected by the trust. For example, a popular term written into an irrevocable trust stipulates at what age a beneficiary can receive the proceeds generated by the sale of assets. You also receive legal protection from future lawsuits and creditors, as well as having to pay for long-term care expenses. If there is a claim for some of your assets, you cannot move the assets into an irrevocable trust to protect the assets.

How to Make Changes to an Irrevocable Trust

The word “irrevocable” is a bit misleading when it comes to setting up a trust. You can make changes, but you have to get the permission of each of the beneficiaries named in the trust. A single dissenter can prevent you from changing or dissolving an irrevocable trust.

State law also plays a role in making changes. For instance, Missouri law allows grantors to change the terms of an irrevocable trust if the assets protected in the trust are not worth enough money to make it reasonable to administer the assets held in the trust. States such as Virginia and New Hampshire permit changes under a legal process called decanting, which alters a trust by implementing updated terms.

The Bottom Line: Should You Establish an Irrevocable Trust?

Because an irrevocable trust is difficult to change, you might be better off placing your assets in a trust that you have the legal right to change. However, creating a trust that is difficult to change works in a few circumstances. First, it is a viable asset protection option for someone who has amassed a significant amount of wealth. Second, irrevocable trusts are an effective way to protect assets for a disabled dependent. Third, a trust that is difficult to alter protects assets that might be dispersed because of the results of a civil lawsuit.

Consulting with Cloud Peak Law Group can help you understand how irrevocable trusts work and whether you want to place your assets in an irrevocable or revocable trust.



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