A trust is an estate planning instrument that allows for the avoiding of the probate process, while simultaneously providing a benefit for a beneficiary or group of beneficiaries. Trusts allow the owner of property to transfer that property, and management of that property, to someone else for the benefit of a third party. Trust laws may vary from state to state but in general, trusts are an efficient way to transfer assets in a way that allows the owner to control and manage the transfer.
There are several different types of trusts, suited for different needs. An irrevocable trust is one that cannot be terminated by the settlor (the property’s owner) once the trust has been established. Irrevocable trusts are in contrast to revocable trusts, which can be changed, modified, altered, or canceled entirely by the settlor.
Generally speaking, all trusts are considered to be irrevocable unless the trust agreement specifies otherwise. Thus, if a settlor wishes for a trust to be revocable, state law typically requires that they include the steps and/or requirements for revocation specifically in the trust document.
However, in some states, revocable trusts are the default, instead of irrevocable trusts. If that is the case, an irrevocable trust may also be created by specific language included in the trust agreement.
What Are Some Pros and Cons of an Irrevocable Trust?
There are several advantages to utilizing an irrevocable trust. First is the simplicity associated with this type of trust. Trust termination is only at the direction of the trust’s beneficiary, and no one else. As such, execution of the trust is subject to fewer disputes. Second, in most jurisdictions, irrevocable trusts are generally the standard trust form. What this means is that there are fewer technical concerns in regards to requirements under most state laws.
Another benefit of an irrevocable trust is that they are initially customizable. Irrevocable trusts can sometimes include specific instructions, such as those involving trust termination. Such instructions make it even less likely that disputes will arise over the trust’s termination conditions. Finally, there are tax consequences to consider. Once the settlor transfers their property or assets to the trust, they are relieved of any tax liability associated with the property or asset.
However, there are some cons to consider when creating an irrevocable trust. One such con is inflexible terms. By design, irrevocable trusts are not subject to much flexibility. Once terms have been set, those terms must be followed. As previously mentioned, this differs from revocable trusts in that they can be modified by the settlor at a later date. Additionally, while irrevocable trusts are relatively straightforward, they can still be complex. Trusts often require the assistance of an attorney when being drafted.
Can an Irrevocable Trust Ever Be Revoked, Changed, or Modified?
State laws regarding the revocation of an irrevocable trust often vary; in general, it cannot be revoked by the settlor without the consent of all beneficiaries involved. An exception to this is when the person establishing the trust is also the sole beneficiary. Such a situation allows the person establishing the trust to revoke it without informing the trustee, or, the person managing the trust for the settlor. Trusts may also be revoked under certain circumstances that the trust’s establisher can prove. An example of this would be if, at the time of the trust’s creation, the settlor was not mentally sound.
The same circumstances that apply to revoking a trust typically apply to changing or modifying an irrevocable trust. The settlor should make it clear when creating the document that they wish to be able to change or modify the trust in the future. Any modification should protect the interests of the beneficiaries, and should not go against the original intent of the person who established the trust.
Many states have specific laws and statutes in place to deal with trust modifications. Courts are allowed some discretion when interpreting trust modification. However, courts are also bound to not stray from the original intent of the person who established the trust, unless doing so would be either impossible or illegal.
Some of the issues involved with irrevocable trusts were mentioned as cons. Other examples can include:
- Lack of agreement between beneficiaries, as any revocation must be agreed to by all beneficiaries; and
- Disputes over how the property is being distributed, or the exact property or financial funds listed in the trust document(s).
Do I Need an Attorney for Help With an Irrevocable Trust?
As every jurisdiction has its own laws and statutes regarding irrevocable trusts, you should speak with a skilled and knowledgeable estate attorney if you wish to set up a trust. An experienced estate attorney can ensure you understand your state’s specific requirements regarding trusts.
Additionally, an attorney can assist you in the drafting, reviewing, and editing an irrevocable trust. Finally, an attorney can represent you in court, should any legal dispute arise concerning the trust.