There are certainly many things about trusts that are confusing. In this article, we’ll take a deep dive into the things you probably didn’t know about the different types of trust, more specifically, about irrevocable trusts.
Some basic facts…
Trust is created when a person intends to entrust his properties or money to another person. This person is under obligation to manage or administer it, for the benefit of the designated beneficiary. As a result, a fiduciary relationship is created between the trustor and the trustee for the benefit of the beneficiary.
Incidentally, this relationship is based upon a special trust or confidence that a trustor has with another person who has the fiduciary duty to act for another person.
2 Basic Types of Trusts
Revocable trust – is made during the lifetime of the trustor and is entirely changeable and revocable, even without the consent of the recipient and the trustee. In short, the trust-maker has all the right to remove the property subject of the trust agreement while he is still alive.
Irrevocable trust – a type of trust where the trustor cannot whimsically withdraw the property or money subject of the trust without the beneficiary’s permissions.
Other types of Trusts
- Asset Protection Trust
- Charitable Trust
- Constructive Trust
- Special Needs Trust
- Spendthrift Trust
- Tax By-Pass Trust
- A Totten trust
Types of an irrevocable trust
- Living trusts – refer to the trustor’s assets placed into a trust during his lifetime and are transferred to the designated beneficiaries upon his death.
- Testamentary trusts – created after the demise of the trustor, and are funded from the deceased’s estate as stated in the terms of his will. A testamentary trust cannot be changed without altering the will first of the trust creator before he dies.
Who is eligible to claim the assets?
So when it comes to an irrevocable trust, who is eligible to claim the assets? These are the persons designated by the trustor in the trust agreement. These designated persons become the beneficial owners of the property either automatically or upon the death of the trustor.
The extent of their beneficial interests depends according to the terms of the trust agreement.
Such as one may be eligible to claim interests from a bank account; while another may be eligible to claim the entire trust assets when he reached a certain age.
Protecting the assets
Trust instrument is not only an estate planning but can also be utilized as protection from creditors, taxes, and probate. Particularly, properties placed into an irrevocable trust are both exempt from creditors claim and probate proceedings. Unlike in revocable trust, assets are not protected from creditors claim and can be sold in satisfaction for the debts due.
Beneficiary as trustee
An irrevocable trust is a permanent agreement that the trustor cannot change or modify its terms. However, in certain instances, a beneficiary in an irrevocable trust may also become a trustee if the latter is found to be unfit to fulfil his obligations according to the terms of the trust. Or when trustor himself designates the beneficiary as a trustee as well in the agreement.
Consider the risks
When you are planning to place your properties into an irrevocable trust, you should carefully consider the risks. You should seek advice from a probate attorney before entering into such a legal arrangement.
Understandably, an irrevocable trust can be a form of trustor protection against creditors. Nevertheless, your properties held in an irrevocable trust may encounter some issues in the future particularly on income taxes, estate taxes, succession planning, and liability concerns.
For example, the trustor will be charged with a donor’s estate taxes when he continuously controls the property and receives the income earned from the assets held by the trust. Likewise, he can be charged for an income tax on income earned from the property.
When a grantor dies, an irrevocable trust created by him will now be considered as a separate tax-paying entity. Meaning that upon the trustor or grantor’s death the trust acquires a personality of its own and thus may be liable for tax charges.
An irrevocable trust is used whenever you would want to keep your properties away from the creditor’s attack and also avoid the costly probate proceedings, among others. However, you should consult a probate lawyer first so that you’ll be guided accordingly before entering into such legal arrangements. This is to prevent costly mistakes.
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