Basics of an irrevocable trust

Do you have family members you want to help financially, but don’t want them to misuse the money you gift to them? Or maybe you want to help your grandkids pay for college, but not fund their extracurricular activities? Proper estate planning may help put those worries to rest. If you’re in a position where you want to retain control of the direction of your assets even after you gift them to someone else, then an irrevocable trust is something to consider.

What is an irrevocable trust?

An irrevocable trust is used to transfer a financial gift to someone while still controlling how the money is spent. Irrevocable trusts can be used for various purposes to preserve and distribute an estate’s assets. They can also be used for minors or individuals with special needs.

With an irrevocable trust, you (the grantor) name a trustee (someone other than yourself) who will be responsible for managing the trust for the beneficiary you designate, such as a child or grandchild. This means you give up ownership and direct control of those assets. The trust spells out the terms and conditions under which the trustee makes distributions to the beneficiary. For example, if the trust is designated for higher education, the student may only be able to use trust assets to pay for tuition.

Unlike a revocable trust, which allows for flexibility, you cannot change or revoke this type of trust once it’s established. An irrevocable trust cannot be modified or terminated without the trustee asking the court for approval. If appealing to the court, the trustee must provide a good reason that doesn’t impact the rights of the beneficiary.

What are the advantages of setting up an irrevocable trust?

The most common reason for setting up an irrevocable trust is for tax purposes. Specifically, an irrevocable trust allows you to remove taxable or appreciating assets from the estate. You can also use the trust to prevent beneficiaries from misusing assets you may want to gift to them. The assets most commonly transferred can include but are not limited to homes, businesses, investments, life insurance policies and cash.

An irrevocable trust can help a loved one financially yet allow you to control how the assets are used. At the same time, it may be beneficial for your personal estate planning purposes.

Since you can’t modify or terminate the trust once it’s established, all rights of ownership to the assets and any income generated from the assets are removed from your taxable estate.

There are two types of irrevocable trusts to consider — a living trust (also known as inter-vivos) or a testamentary trust. A living trust is created and funded by you, during your lifetime. For example, you may choose to fund the trust with a life insurance policy to help reduce the impact of a life insurance payout to your estate later. A testamentary trust is created and funded after you die according to the terms of your will.

No matter the reason for creation, an irrevocable trust is a complex legal arrangement in which current and future tax implications need to be considered. Therefore, it should be set up with the assistance of an estate planning attorney. For Credit Union members, help is just a phone call away. Members can get low-cost help with their estate planning needs by contacting their local branch.