Irrevocable Living TrustJanuary 8, 2021
Irrevocable Living Trust
Once thought to be the exclusive domain of very wealthy people, an irrevocable living trust can make sense for those of more modest means. Essentially a trust fund allows valuable assets such as stock, real estate, and cash to continue to hold or even increase their value after the grantor — the maker of the trust — has died. A trust also gives you control over how and when the assets are distributed, in often tax-advantaged ways.
Let’s start by looking at the three components of any trust:
- The Grantor: Holds the assets to be placed in a trust
- The Trustee: Serves as a fiduciary to oversee the management of the trust’s assets. The trustee can be an individual, an institution, or some combination of both.
- Beneficiaries: Those who receive money or other assets from a trust.
What is an Irrevocable Living Trust?
An irrevocable living trust means that the document is written and in effect while the grantor is alive. Irrevocable means that its terms cannot be easily altered, amended, changed, revoked or terminated. In contrast, a revocable living trust can be revoked or terminated; it becomes irrevocable after the grantor dies.
Though irrevocable is intended to be permanent, The Pennsylvania Uniform Trust Act recognizes that circumstances could warrant changing the language in the trust. For example, a trust may include investment rules that are out of sync with the modern investing environment. A trust may need to be altered to comply with federal or state tax law changed. The process to change an irrevocable living trust is called a trust reformation, which we’ll cover a bit later.
Related Post: Living Trust vs Will: What’s the Difference?
What are the Different Types of Trusts?
Reducing taxes, protecting property, and transferring wealth are the primary reasons people set up irrevocable living trusts. These types of trusts can also be established in a Last Will and Testament.
The following is a partial list of the different types of trusts that can reduce taxes or avoid them altogether:
1. Charitable Trusts
Reduces income and estate taxes by making gifts to charities.
2. Bypass Trusts
Used by spouses, the trust is established so when the first spouse passes, their property goes into the trust. The surviving spouse can benefit from the trust property and income from it, but he or she never owns. Thus, that property is not included in his or her estate. The surviving spouse cannot redirect the assets to other persons such as a new significant other.
3. Grantor-Retained Interest Trusts
The grantor retains some interest in the trust for a set period of time. Examples of a trust interest include a fixed annuity, trust income, or the right to live in the trust property.
For asset protection, the list is much shorter. A spendthrift trust is best for a situation where you have concerns about the beneficiary’s ability to responsibly use the assets. You’ll spell out the rules, and the trustee will make sure they’re followed. A special needs trust is intended to provide financial support for a special needs person in a way that won’t affect their ability to qualify for government benefits.
Establishing an Irrevocable Living Trust
If you’re thinking an irrevocable living trust might be right for you, your next step should be to consult an estate planning attorney near Harrisburg, PA. They can help you clarify your goals and select the best irrevocable living trust type to achieve them. Of course, preparing the trust document properly is essential.
You’ll also need an estate planning attorney if you realize the irrevocable living trust you created or are the beneficiary of needs to be altered. That process is called trust reformation. If the trust document granted power to a trustee or a trust protector to revise the terms, the path forward will be much easier. Similarly, a decanting provision in the document would allow the trust to be changed. That decanting provision would allow the trustee to move assets from the original trust into a new one with more favorable terms. Even if there are no provisions in the document specifically granting the power to alter the document, you do have recourse through the Orphans’ Court.
Looking at the irrevocable living trust from the trustee’s perspective, being named a trustee comes with some hefty responsibilities. They include paying taxes, investing wisely, and taking care of any contractual obligations. The trust may become involved with lawsuits, and the trustee would need to either sue or defend. For these reasons, if you’re asked to be a trustee, you should speak with an attorney to see how they could help you.
Whether you want to create an irrevocable living trust or are looking for legal help as a trustee, Daley Zucker has experienced estate planning attorneys who can help. Contact us today for a free consultation.