Risks of an Irrevocable Trust

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The irrevocable trust is a type of estate planning tool that many people use to try to minimize estate and gift taxes. Once you set up this type of trust, you cannot change the terms of it, in most cases. While this type of trust can be beneficial, you also have to deal with a few risks along the way.

Changing the Terms

With a revocable trust, you can easily change which beneficiaries are getting which parts of your estate if you change your mind about how you want your estate distributed. With the irrevocable trust, it will not be possible to change the terms once established.

Changing Beneficiaries

One of the most common issues encountered with an irrevocable trust occurs when there is a desire to change beneficiaries, the problem being that, once you set up the irrevocable trust, you cannot change the beneficiary. The beneficiary is the only one who can alter the agreement at this point. If your situation changes and you have a beneficiary that no longer has a role in your life, you might find it necessary to change the trust. This can be difficult with the irrevocable trust.

Tax Issues

When you set up this type of trust, the trust will then have to pay its own taxes. When you transfer the money from your possession into the possession of the trust, gift tax rules apply. If you transfer more than the gift tax exemption, you may have to pay taxes on the amount that you transfer. Your trustee will also have to file annual income tax returns on behalf of the trust, which leaves room for filing mistakes and penalties.

Misinterpretation

Another potential risk that you may have to deal with when setting up an irrevocable trust is the risk of misinterpretation. When you set up this type of trust, it will be up to the trustee to make the distributions according to your wishes. If you do not make one of your wishes completely clear in the trust documents, the trustee could make a mistake. At that point, there is nothing you can do about the distribution.

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