What Are the Requirements for a Valid Trust?
It is relatively simple to create a trust. In order to be valid, a trust must meet several requirements, including the following:
- Intent: The trustor must have intended to create the trust at the time it was created.
- Trustee: There must be an individual who is in charge of managing the trust for the benefit of the beneficiary and transferring the assets to the beneficiary. The court may appoint someone if no specific individual is designated.
- Beneficiary: The trust must state who will receive the trust’s assets.
- Purpose: The trust must have a specific purpose that does not involve furthering illegal activity.
- Assets: The trust must have assets, for example, money or property.
What Is an Irrevocable Trust?
A trust is an estate planning instrument that allows an individual to avoid the probate process while also providing a benefit for a beneficiary or group of beneficiaries. A trust allows the property owner to transfer that property and the management of that property to another individual for the benefit of a third party.
The laws that govern trusts may vary by state. However, in general, trusts can be an efficient way to transfer an individual’s assets in a way that allows the property owner to control and manage the transfer.
There are numerous different types of trusts that are available for different needs. An irrevocable trust is a trust the property owner cannot terminate, or settlor, once the trust has been created.
An irrevocable trust is different from a revocable trust, which can be changed, modified, altered, or canceled entirely by the settlor. In general, all trusts are considered to be irrevocable unless the trust agreement specifies otherwise.
Therefore, if the settlor wants the trust to be revocable, state laws usually require that the individual include the steps or requirements for revocation in the trust document. In some states, however, a revocable trust, not an irrevocable trust, is the default.
If a revocable trust is the default, an irrevocable trust may be created by the specific language being included in the trust agreement.
What Can Be Placed in a Trust?
One requirement for a trust is that it contains assets. The title to those assets should be transferred to the trust if it has a title, for example, real estate or stocks and bonds.
The title to personal property, for example, clothing, furniture, and jewelry, does not exist. It may also be possible to transfer these assets to the trust by transferring the property rights to the trustee to serve as assets for the beneficiaries of the trust.
There are certain types of things that cannot be transferred into a trust because their distribution is determined by the beneficiary who is named in the policy, including:
- Life insurance policies
- Retirement accounts
- Pension plans
- Health savings accounts
In order to place assets derived from those items in a trust, the named beneficiary has to be the trustee.
Who Is Considered a Valid Beneficiary?
Any individual can be a trust beneficiary as long as they are properly named in the trust document. Beneficiaries typically include:
Depending on the trust, others may also be beneficiaries, including the following:
When a trust is created, it has to be ascertainable. The description of a beneficiary must be detailed enough for a court to determine their identity.
What Are Some Pros and Cons of an Irrevocable Trust?
There are advantages to creating an irrevocable trust. Termination of the trust only occurs at the direction of the beneficiary.
The execution of irrevocable trusts is typically subject to fewer disputes. In most jurisdictions, an irrevocable trust is generally the standard trust form, meaning that there are fewer technical concerns related to the requirements of most state laws. An additional benefit of irrevocable trusts is that they are initially customizable.
An irrevocable trust may include specific instruction, for example, regarding trust termination. These types of instructions make it less likely that a dispute will arise regarding the termination of the trust.
There are also tax consequences of irrevocable trusts. Once a settlor transfers their property or assets to a trust, they will be relieved of tax liabilities that are associated with the asset or property.
There are, however, also some cons an individual should consider when creating an irrevocable trust. One major con is inflexible terms.
By its design, an irrevocable trust is not very flexible. Once the terms of the trust have been set, they must be followed.
As previously noted, this is different from a revocable trust which the settlor can modify at a later date. In addition, while an irrevocable trust is relatively straightforward, it can still be complex.
Creating a trust will usually require the assistance of an attorney to draft.
Can an Irrevocable Trust Ever Be Revoked, Changed, or Modified?
The state laws governing the revocation of an irrevocable trust may vary. Generally, it cannot be revoked by a settlor without the consent of all of the beneficiaries.
One exception to this is when the individual establishing the trust is also the only beneficiary. This type of situation allows the individual who is establishing the trust to revoke the trust without informing the trustee or individual managing the trust.
A trust may also be revoked under certain circumstances that the individual who establishes the trust can prove. For example, if, at the time the trust was created, the settlor was not mentally sound.
The same requirements that apply to revoking a trust typically also apply to changing or modifying the irrevocable trust. A settlor should clearly indicate when creating the trust document that they want to be able to change or modify the trust in the future.
Any modification of the trust should protect the interest of the beneficiaries and not go against the intent of the individual who established the trust. Many states have specific laws and statutes in place to deal with trust modification.
A court will be allowed some discretion when interpreting a trust modification. A court, however, is also bound to not stray from the original intent of the individual who established the trust unless doing so would be impossible or illegal.
Some other issues that are involved with irrevocable trusts may include the following:
- A lack of agreement between beneficiaries, as all beneficiaries must agree to any revocation.
- Disputes over how the property is distributed.
- Disputes over the exact property or financial funds listed in the trust document(s).
Do I Need an Attorney for Help With an Irrevocable Trust?
Because every jurisdiction has its own laws and statutes governing irrevocable trusts, it is essential to consult with a trust lawyer if you wish to set up a trust. An experienced trust lawyer can help ensure you understand your state’s specific requirements regarding trusts.
Your lawyer can also help you draft, review, and edit your irrevocable trust. If any disputes arise related to the trust, your lawyer will represent you in court.