Every different form of trust contains its unique benefits and drawbacks that depend on an individual’s estate planning needs. One particular example involves the choice between irrevocable and revocable trusts.
As the name implies, an irrevocable trust cannot be altered or terminated by the grantor after it has been created, whereas a revocable trust such, the trust incurs a tax liability, which can be less than if an individual tax liability. Conversely, the tax liability for assets held in a revocable trust is taxed to the grantor. The treatment of irrevocable trust assets as being separate from the grantor’s assets also applies to the protection offered from creditors. The assets in an irrevocable trust will not be treated as attachable by a creditor, whereas revocable trusts can be attached to creditor claims.
An irrevocable trust can be altered or terminated only under limited conditions and requires the consent of the trustee or beneficiaries and in some cases court approval. Therefore, the grantor, for better or worse is bound by the trustee’s decision making with regard to asset management and distribution. This lack of control stands as one of the obvious drawbacks related to irrevocable trusts rests in the fact that the grantor is unable to control trust assets. Although this lack of control is the reason irrevocable trusts provide tax benefits to grantors and protection from creditors, some people may choose to avoid irrevocable trusts for the lack of control they offer in the area of trust management. However, there are some legal arrangements, which allow a grantor to retain some level of control over the trust will maintaining the integrity of the trust.
Limited Powers of Appointment
One such mechanism involves incorporating limited powers of appointment into the trust. A limited power of appointment grants authority to a beneficiary to designate the recipients of property held in a trust. For example, a trust established for a grantor’s spouse contains a limited power of appointment, which allows the beneficiary-spouse the power to transfer remaining in the trust at her death among children, grandchildren or other beneficiaries such as a charitable organization. A limited power of appointment provides flexibility by allowing a beneficiary to alter the distribution plan to accommodate changes in circumstances
A trust protector provides oversight to trust administration. The trust protector is selected by the grantor to represent his or her interests in making specific trust decisions that the grantor is unable to make. The trust protector assumes the duties the trust’s beneficiary would normally hold concerning make changes to the trust or providing oversight. In this capacity, a trust protector provides a more effective way to make alterations to a trust without compromising the trust’s integrity.
Irrevocable trusts provide many benefits from an estate planning perspective, but also limit the amount of control a grantor can exercise over trust administration. The strategies outlined above can offer greater flexibility for trust administration while preserving the benefits offered by an irrevocable trust. Counsel experienced in trust formation can provide advice as to whether these strategies are appropriate for your situation.
DISCLAIMER: Attorney Advertising. The information provided in this post is for informational purposes only and should not be construed as a legal advice. It is not intended to create an attorney-client relationship with a reader and should not be relied upon without first seeking professional legal counsel.