Irrevocable Living Trusts

In this post, I discuss the irrevocable living trust and the advantages it can provide as part of a comprehensive estate plan.

*Photo by Bridget Coila is licensed under CC 2.0. *

In a previous post, I discussed revocable living trusts, commonly known simply as living trusts. A revocable trust is a trust that the settlor—that is, the creator of the trust—can revoke at any time. As a result of its revocable nature, the property in the revocable trust is still considered to be that of the settlor for estate tax purposes, and the income of the trust is still considered the income of the settlor for income tax purposes.

The irrevocable living trust, however, is very different. Once created, the irrevocable living trust cannot be uncreated or revoked, and trust property cannot be removed from the trust except as provided in the trust documents. The property held in the trust is considered to be the property of the trust for tax purposes, not the property of the settlor. In fact, irrevocable trusts even have their own unique income tax brackets.

Nature of the Irrevocable Living Trust

Once created, an irrevocable trust’s terms cannot be changed, nor can the trust be terminated, until the terms or purposes of the trust as specified in the original trust documents have been fulfilled. Neither the trustee, nor the beneficiaries, nor the settlor can change the terms of the trust once created.

Only in rare, extraordinary circumstances can the terms of the trust be changed by court order, but circumstances must have changed so dramatically as to make the change a practical necessity. Achieving a change through the courts is extremely difficult and is a method only available in the most extreme circumstances. For example, a trust set up to benefit a university that later dissolves may justify the intervention of the courts.

Reasons for Setting Up Such a Trust

There are a variety of reasons you may want to establish an irrevocable trust during your lifetime. (An irrevocable living trust differs from a testamentary trust, which is created through a will after the settlor’s death.) You may want to give a gift to a child that is bad with money. By putting the money in trust, you ensure that the child receives a regular allowance, but that the funds are distributed in amounts and at times as you specify in the trust documents. You may even set up the trust to pay your child’s bills directly, rather than giving him or her the cash. Through the trust, you are able to provide for your child, while also removing the property from your estate.

You may also have property that you think will grow in value over the course of your life. By placing the property in an irrevocable living trust, you remove the property from your estate, ensuring that a potentially valuable piece of property does not eventually become subject to the estate tax at your death. In addition, you can set up trust terms that allow you to continue to enjoy the property during your life—though this must be done carefully to avoid the property’s being considered part of your estate at death.

Irrevocable living trusts can prove useful in a variety of circumstances. Because they are irrevocable, however, they should be formed only after careful consideration and with the assistance of a competent attorney.

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See Also:

The Living Trust

Introduction to Trusts