What is an Irrevocable Trust?

The terms of an irrevocable trust may not be amended or modified and the trust itself cannot be revoked.  While trusts are often used in estate planning, irrevocable trusts are not as common as revocable trusts.  Residents of Fort Wayne, Indiana and other states would benefit from a basic review of trusts.  Such a general review will assist in a more detailed discussion of the purposes and applications of irrevocable trusts.

A trust is an agreement between the person establishing the trust, known as either a trustor or a settlor, and a trustee.  The trustee becomes the legal owner of the property owned by the trust. The trustee controls the property but holds it for the benefit of someone else, known as the beneficiary.  When the settlor transfers property to the trustee of an irrevocable trust, the settlor forever loses the right to possess the property.  For this reason, an irrevocable trust may not be right for everyone.
Irrevocable trusts have distinguishing attributes.  The settlor creates an irrevocable trust and transfers property to the trustee while the settlor is living.  This lifetime transfer is different from testamentary trusts which are funded only at the time of the settlor’s death. Since irrevocable trusts are funded during the settlor’s lifetime, the settlor has the ability to evaluate the trustee to ensure assets are handled appropriately.
Another distinguishing attribute of an irrevocable trust is privacy.  By law, the property that the settlor has transferred to the irrevocable trust is no longer owned by the settlor and not included in the settlor’s estate.  Therefore, these assets do not pass through probate, which are court-supervised proceedings and part of the public record.  Privacy as to the extent and nature of assets is afforded by irrevocable trusts.
Another feature of an irrevocable trust is its permanency.  Aside from certain unusual circumstances, an irrevocable trust will not be revoked until a time established by the trust itself.  This is different from revocable trusts, which beneficiaries may cancel, modify, or revoke at any time – with court approval and unanimous agreement among the trust’s beneficiaries.
Perhaps the most compelling feature of an irrevocable trust is the ultimate minimization of death taxes.  The  assets of revocable trusts are subject to death taxes because they are deemed owned by the settlor at death.  By contrast, assets transferred to irrevocable trusts avoid death taxes under current federal law and many state laws.
Notwithstanding the advantage of death tax minimization made possible by irrevocable trusts, there are gift tax implications associated with this type of trust that an estate planning attorney will be able to address in light of your specific situation.  The triggering of gift taxes will be assessed at the time an irrevocable trust is established during your lifetime.  Although the minimization of death taxes is a strong benefit of irrevocable trusts, the triggering of potentially significant gift taxes, and their timing, should be considered carefully by the settlor before selecting the irrevocable trust option.