There are many types of trusts to suit different individual’s needs and circumstances. Trusts can be broadly categorised into a few primary types, and one of these is that of an “irrevocable living trust”. In this article, we will discuss what exactly an irrevocable living trust is, as well as its benefits, and the different types which exist.
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A living trust is simply the term used for any trust which is created and goes into effect during the trust grantor’s lifetime. Living trusts encompass several subcategories of trusts. By convention, the term “living trust” usually refers to a revocable trust, but it is also possible to have an irrevocable living trust.
At the time that a living trust is created, the grantor designates a trustee to manage the assets in the trust for the ultimate benefit of the trust’s beneficiaries. The way in which assets are distributed to beneficiaries, and when, depends on the specific trust terms and type of living trust used.
One of the most important distinctions is that between irrevocable and revocable trusts. Irrevocable trusts, as the name implies, cannot be altered or terminated after they have been created, except in rare circumstances and with the permission of the trust beneficiaries.
In contrast, the grantor retains the power to modify or terminate a trust if it is revocable. This greater level of control and flexibility is what makes revocable trusts the more widely used and popular choice; however, there are some distinct benefits to using an irrevocable trust.
Note that a revocable trust automatically becomes irrevocable upon the death of the grantor, as the terms are then locked in place, and no one has the power to alter them.
It should be obvious that an irrevocable living trust is simply a trust with the features of both a living trust and an irrevocable trust combined. It is formed and comes into effect during the grantor’s lifetime, and its terms cannot be altered or terminated after it has been established.
Irrevocable trusts have numerous benefits and uses. There are also a number of different types of trusts which fall under this category.
Go here for more info on the types of irrevocable trusts.
When you form an irrevocable living trust, you will need to designate a trustee and name one or more beneficiaries of the trust. The trustee is in charge of overseeing and managing the assets in the trust, for the ultimate benefit of the trust beneficiaries. They are also responsible for handling the tax payments owed by the trust.
The beneficiaries are those to whom the assets in the trust are distributed to in accordance with the terms of the trust. Note that it is acceptable for one of the beneficiaries to act as trustee, but the grantor cannot be the trustee of an irrevocable trust. In normal circumstances, the grantor cannot also be a beneficiary, with the exception of Asset Protection Trusts.
Irrevocable trusts cannot be modified once the terms are established. This means that when you transfer assets into the trust, you lose all ownership and control of them. The trust is now the legal owner of the assets, and these assets will be distributed/utilised in accordance with the original terms which were set when the trust was established.
The drawback of irrevocable trusts is that they cannot be modified or terminated after they are formed. This is a frightening prospect for many, as it means a loss of control of the assets which are transferred into the trust. However, this trade-off also brings with it some unique benefits and use cases, which include:
Asset protection trusts (APTs) are a special type of irrevocable living trust which allow the grantor to also be the beneficiary, and so retain the benefit of the assets transferred into the trust without actually being the legal owner.
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“Irrevocable living trust” is really a broad term in which numerous different sub-types of trusts can be categorised. The most commonly used types of irrevocable living trusts include:
For more: Different Types of Irrevocable Trusts
For more detailed information on these types of irrevocable living trusts and how they work, refer to the article “What Are the Different Types of Irrevocable Trusts?”. Each of these types of trusts have their own unique features and benefits, so choosing the right one will depend entirely on your circumstances and objectives for using the trust.
An irrevocable living trust is a powerful and versatile financial instrument which can fulfil very specific financial needs and estate planning objectives that other types of financial tools cannot. They generally provide a much more efficient means for transferring your estate to your heirs as compared to a will. In addition, they can fulfil other important functions related to personal asset protection, tax reduction, and financial privacy.
That being said, the loss of personal control over the assets that are transferred into an irrevocable living trust is a serious drawback for many. This is a necessary trade-off for the powerful benefits that these types of trusts can provide. Not everyone necessarily needs an irrevocable trust though, and they are more suited to individuals with very large estates.
To get a better idea as to whether you should be using an irrevocable living trust in your personal financial and estate planning, it is best to consult with a trust expert. They can guide you as to whether such an instrument is right for you, and the specific structure to use to best achieve your objectives.
Disclaimer: Offshore Protection strives to keep information on this website updated, however, laws and circumstances are subject to change. All information on this website is for reference purposes only and does not constitute legal or tax advice. Contact Offshore Protection for specific advice regarding your situation.