Irrevocable Trust FAQ
Trusts are legal creations that can provide significant benefits, including avoiding probate, appointing professional trustees, sharing income and property, and saving taxes. Trusts often raise many questions, but in short, trusts are generally not very complicated.
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What Does Irrevocable Mean?
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A trust is irrevocable when you, the trustor (meaning the person who created the trust), do not have the power to unilaterally terminate the trust. Compare this to a revocable trust where you can terminate the trust at any time, for any reason, and without anybody's permission beyond your own.
Does an Irrevocable Trust Ever End?
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Even though the trust is irrevocable, that does not mean the trust will continue on for eternity. Instead, irrevocable means that to terminate the trust, you must have the consent of the trustee and the beneficiaries. In other words, you must get their permission to terminate the trust. This sounds easier than it typically is. A trustee can only consent to trust termination for a few limited reasons, typically including if the trustee determines that the trust is no longer economically viable or is no longer beneficial to the beneficiaries. And the beneficiaries are not likely to consent to the termination of the trust, primarily because the beneficiaries will lose money and/or property rights without the trust.
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Who Decides Whether a Trust Is Irrevocable?
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When you, the trustor, create the trust, you will decide whether the trust is revocable or irrevocable. Most likely, you will define the terms of the trust is in a written legal trust document. In that trust document, you can define whether the trust is irrevocable or revocable. This means you have the power to decide the fate of the trust. However, once you establish an irrevocable trust, you lose a lot of control, so plan wisely when making the initial decision.
Why Make a Trust Irrevocable?
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An irrevocable trust means you lose control over the trust property, so why take that risk? The most common reason for making a trust irrevocable is that it can provide tax savings, particularly on income-producing property. For example, if you own investment property that you rent out, you will have to pay income tax on the rental income. If you have other income during the year, you will fall into a high-income tax bracket, meaning the rental income is taxed at a high rate. However, if you transfer the property to an irrevocable trust, then the trust is taxed at a lower tax rate, resulting in a net tax savings.
What About Estate Taxes?
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An irrevocable trust can also help avoid estate taxes, though this is only relevant for very large estates worth at least $3.5 million (as of 2009; however, as of 2011, that number reduces to $1 million). As long as your estate (meaning your net worth when you add up all your money and property and subtract all your debts) is below that amount, you should not worry about estate taxes. However, if your income exceeds that amount, you should consider an irrevocable trust to help save estate taxes. This is a complicated decision that should involve accountants and lawyers.
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