Irrevocable. Permanent. Forever.
When it comes to decision-making, these words are anything but comforting. So, when you sit down with your estate planning attorney and they suggest creating an irrevocable trust, it’s natural to be a bit hesitant. After all, laws and circumstances change, and our ability to accurately predict the future is, well, not great. But if you’re having doubts about setting up an irrevocable trust, take heart: irrevocable trusts can be designed with a lot more flexibility than you may think.
What Are the Benefits of an Irrevocable Trust?
Irrevocable trusts are a hallmark of estate planning, offering a range of benefits including limiting tax liability, protecting assets from creditors, and providing for loved ones. In return for these advantages, however, the trust’s creator (known as a grantor) must give up control over any property he or she places in trust. In other words, at least on paper, these assets no longer belong to the grantor.
Legally speaking, that act of relinquishing ownership is critical. For example, the IRS can’t demand you pay taxes on property that you don’t own. Similarly, a creditor can’t access assets you place in an irrevocable trust because they are not permitted to take property that is no longer yours in order to satisfy a debt.
How Can I Add Flexibility to My Irrevocable Trust?
While the idea of giving up control over your property may be a bit unsettling, there is a number of ways to make certain that the assets you place in trust will be used wisely for decades to come. Here are three to consider:
- Limited Powers of Appointment
A trust’s grantor has the power to appoint someone, known as a holder, to designate who the recipients of property held in trust will be. The holder can also determine how much a beneficiary will receive and when any distributions will be made. The appointment may be general or limited, the primary difference being that a limited appointee cannot make themselves a beneficiary of the trust’s assets.
A limited power of appointment is an excellent way for the grantor of an irrevocable trust to ensure the trust’s assets will be distributed in a maximally beneficial manner. That’s because a limited power of appointment allows the holder to adjust the distribution plan based on new information and changed circumstances. For example:
- A grantor can reserve a limited power of appointment for themselves. This allows the grantor to change the trust’s beneficiaries at anytime before the grantor’s death.
- The grantor may also choose to give a limited power of appointment to someone else. For example, a grantor creates a trust for the benefit of his daughter, Julia. Julia is also granted a limited power of appointment to distribute the trust’s remaining assets to her children at her death. This means that Julia is now empowered to decide which of her children will receive distributions, how much the distributions will be, and when those distributions will be made. This strategy allows the original grantor to provide for his grandchildren while relying on Julia’s knowledge and insight to make sure the trust’s assets are distributed wisely.
- Trust Protectors
A trust protector is an independent third-party that is given certain powers and duties regarding a trust. Generally speaking, a trust protector acts as a representative of the trust’s creator, overseeing the trustee’s decisions. The trust protector is also typically empowered to take specific actions to ensure the trustee is acting in accordance with the terms of the trust. These include replacing a trustee, amending the terms of the trust, and, in certain circumstances, dissolving the trust and returning the property to the grantor.
- Decanting a Trust
A number of states allow a trust’s rules to be reformed or for a trust’s assets to be transferred to a new trust under new terms. This process is known as decanting and can often be done without court approval. If you’re looking for increased flexibility in your irrevocable trust, consider including a provision that allows for decanting.
In sum, you can reap the benefits of an irrevocable trust without feeling as though its terms are set in stone. And while we’ve outlined a number of methods to add some versatility to your irrevocable trust, it is by no means an exhaustive list. The important thing is how you, and your estate planning attorney, draft the provisions of the trust.
Whether you’re interested in adding an irrevocable trust to your current estate plan, or are just starting to plan for the future, we would invite you to discuss your goals and situation with a trusted, experienced estate planning lawyer.