An irrevocable trust is a trust which cannot be altered without the involvement and consent of the beneficiary, in contrast with a revocable trust, which can be changed by the grantor. There are some definite advantages to setting up an irrevocable trust, but there are also some very serious disadvantages which people should consider before establishing such a trust. It is also important to use the services of a skilled legal professional when writing up the documents which pertain to the trust, to ensure that it is established appropriately.
When a grantor creates an irrevocable trust, he or she gives up control of the assets in the trust. This creates a totally separate tax entity, because the trust is not controlled by the grantor, and it is not yet controlled by the beneficiaries, either. The trust pays its own taxes, and it is usually administered by a trustee.
Giving up one's assets might not seem to have any particular advantages at first glance. However, one of the convenient things about an irrevocable trust is that it allows people to avoid probate and many of the associated taxes and fees, because the grantor has given the property away before death. He or she can make contributions to the trust over the course of time, ensuring that beneficiaries will be able to access the trust immediately upon death, rather than having to wait through probate, and that beneficiaries will avoid many of the estate taxes and fees.
People can also use irrevocable trusts to protect their assets. Because the assets are not owned or controlled by the grantor anymore, the grantor's creditors have no right to access the funds and other assets in the trust. This technique can be utilized by someone who wants to make sure that his or her estate ends up in the hands of family members and other beneficiaries, rather than with creditors who would be able to take a slice of the estate during conventional probate proceedings. Reducing one's assets also tends to lower taxes, which can be a side benefit in some cases.
Trust law
In common law legal systems, a trust is an arrangement whereby property (including real, tangible and intangible) is managed by one person (or persons, or organizations) for the benefit of another. A trust is created by a settlor (or feoffor to uses), who entrusts some or all of their property to people of their choice (the trustees or feoffee to uses). The trustees hold legal title to the trust property (or trust corpus), but they are obliged to hold the property for the benefit of one or more individuals or organizations (the beneficiary, cestui que use, or cestui que trust), usually specified by the settlor, who hold equitable title. The trustees owe a fiduciary duty to the beneficiaries, who are the "beneficial" owners of the trust property.
The trust is governed by the terms of the trust document, which is usually written and occasionally set out in deed form. It is also governed by local law. The trustee is obliged to administer the trust in accordance with both the terms of the trust document and the governing law.
In the United States, the settlor is also called the trustor, grantor, donor or creator.
[edit] Trustees
The trustee can be either a person or a legal entity such as a company. A trust may have one or multiple trustees. A trustee has many rights and responsibilities; these vary from trust to trust depending on the type of the trust. A trust generally will not fail solely for want of a trustee. A court may appoint a trustee, or in Ireland the trustee may be any administrator of a charity to which the trust is related. Trustees are usually appointed in the document (instrument) which creates the trust.
A trustee may be held personally liable for certain problems which arise with the trust. For example, if a trustee does not properly invest trust monies to expand the trust fund, he or she may be liable for the difference. There are two main types of trustees, professional and non-professional. Liability is different for the two types.
The trustees are the legal owners of the trust's property. The trustees administer the affairs attendant to the trust. The trust's affairs may include investing the assets of the trust, ensuring trust property is preserved and productive for the beneficiaries, accounting for and reporting periodically to the beneficiaries concerning all transactions associated with trust property, filing any required tax returns on behalf of the trust, and other duties. In some cases, the trustees must make decisions as to whether beneficiaries should receive trust assets for their benefit. The circumstances in which this discretionary authority is exercised by trustees is usually provided for under the terms of the trust instrument. The trustee's duty is to determine in the specific instance of a beneficiary request whether to provide any funds and in what manner.
By default, being a trustee is an unpaid job. In modern times trustees are often lawyers or other professionals who cannot afford to work for free. Therefore, often a trust document will state specifically that trustees are entitled to reasonable payment for their work.
- Irrevocable trust. In contrast to a revocable trust, an irrevocable trust is one in which the terms of the trust cannot be amended or revised until the terms or purposes of the trust have been completed. Although in rare cases, a court may change the terms of the trust due to unexpected changes in circumstances that make the trust uneconomical or unwieldy to administer, under normal circumstances an irrevocable trust cannot be changed by the trustee or the beneficiaries of the trust.
- Revocable trust. A trust of this kind can be amended, altered or revoked by its settlor at any time, provided the settlor is not mentally incapacitated. Revocable trusts are becoming increasingly common in the United States as a substitute for a will to minimize administrative costs associated with probate and to provide centralized administration of a person's final affairs after death.
