Advantages and Disadvantages of Irrevocable Trusts

April 17, 2018

One of the most common questions when considering trusts is whether to make them irrevocable.  The most common type of trusts, however, are “revocable living trusts,” which can become irrevocable upon the death of its creator (i.e., “grantor” or “trustor”) and often leads to confusion about revocable versus irrevocable trusts. The following is a brief explanation of these estate planning vehicles along with the most common advantages and disadvantages of irrevocable trusts.

What is an Irrevocable Trust?

An irrevocable trust is established by an individual or married couple that ordinarily cannot be modified or terminated without the approval of a court of law or, in certain limited circumstances, through the actions of beneficiaries or the trustee.  This certainly differs from the common revocable living trust, which can be amended, modified, or revoked by its creators during the life.

To learn more about trusts, please read Common Questions Clients Ask Us About Trusts.

Who is the Beneficiary and Who is the Grantor of an Irrevocable Trust or Revocable Living Trust?

The grantor of an irrevocable trust is the person who establishes the trust and ordinarily transfers assets into the trust either by gift or a sale. The beneficiary or beneficiaries of a revocable living trust or irrevocable trust are those persons determined by the grantor upon establishing the trust agreement. In the case of a revocable living trust, the grantor may be the sole beneficiary during his or her life, with other beneficiaries named to receive assets upon the grantor’s death, as detailed in the trust agreement.  Upon the grantor’s death, the revocable living trust can and ordinarily does become irrevocable for its beneficiaries, which can provide creditor protection and related benefits for the beneficiaries.  For a trust established by a grantor that is irrevocable at its creation, the grantor ordinarily is not a beneficiary of such irrevocable trust during his or her life for tax and other purposes, and is mainly used as a tax planning strategy for Federal and State income tax, estate tax, gift tax, and generation skipping transfer tax purposes.   There are, however, various estate planning structures which may not fit either model with precision, which certainly emphasizes the need to work with an experienced and knowledgeable estate planning attorney.

Some of the other types of estate planning tools often used in conjunction with an irrevocable trust or apart from include:

• Wills
• Living trusts
• Revocable trusts
• Family trusts
• Special needs trusts
• Charitable trusts

At Tiffany and Bosco, we will help you explore every option the law avails to protect and transfer assets, whether via an irrevocable trust, revocable living trust, or any other form of trust. As with any estate planning tool or vehicle, there are advantages and disadvantages to their use. What are these?

What are the Pros and Cons of Irrevocable Trusts?

When considering the pros and cons of an irrevocable trust, an ultimate irony is that one of the key advantages can easily become a strong disadvantage if careful planning and consideration is not employed. We speak of the permanency of the arrangement.

Remember, with an irrevocable trust, no changes may be made once established, unless there is judicial involvement with a court, which can be timely and costly, or other unique circumstances exist. When someone establishes an irrevocable trust, they ordinarily relinquish control over the assets within it and cannot regain them at a later point. The trustee thereafter holds the assets of the irrevocable trust in a fiduciary relationship for the benefit the beneficiaries until the terms of the trust are met.

So, if the grantor has not carefully considered whether the assets may be needed in the future, they could face needless difficulties – the permanent nature of the irrevocable trust will not allow them to use or liquidate the assets within.  This is why the revocable living trust is a much more common type of trust established.

Avoiding the Estate Tax?

Another traditional advantage of an irrevocable trust has been to avoid the dreaded estate tax, which has now been in existence for over 100 years!  While the majority of the population in the United States will never be impacted by the estate tax (or the generation skipping transfer tax, commonly referred to as “GST tax”), for those that might or most certainly will be impacted, an irrevocable trust and the techniques associated with it are often an effective tool to combat or avoid the estate and GST taxes.  One issue that taxpayer face in relation to the estate tax is the laws are continually changing in relation to the tax rate and exemption amounts, which is something that the tax and estate planning attorneys of Tiffany & Bosco, P.A. can assist clients and families in understanding.

Protect Loved Ones

Another strong benefit of irrevocable trusts is making sure someone who is unable to care for themselves is cared for long after the grantor is gone.  For example, for a revocable living trust, the attorney assists the grantor in specifically tailoring provisions for loved one upon the death of the grantor, such as how much should the beneficiary receive and when?  This can protect the beneficiary from receiving too much too soon and better avoid a blown inheritance, but also better protect children, grandchildren, or other beneficiaries from creditors or having the trust assets being lost in a divorce.  For an irrevocable trust, the grantor must be certain that the provisions for the benefit of the beneficiaries are ideal now and well into the future, as it is unlikely judicial modification would permit changing those terms.

How an Attorney Can Help Decide if Irrevocable Trust is Right for You

One key disadvantage of an irrevocable trust is the inflexible, permanent nature of the vehicle. Yet, this very disadvantage is also a strong advantage under the right circumstances. The other strong disadvantage is the complexity of these estate protection tools.

This is where the advice from a lawyer can help. They not only know how to ensure the proper establishment of an irrevocable trust, but also how to advise when considering whether and how to best use them. If you are considering a trust fund of any kind, contact our estate planning and trusts team.