Irrevocable trusts are a special type of trust which cannot be modified, amended, or cancelled, except under specific conditions. They contrast with revocable trusts, which can be changed or terminated by the grantor
This means that once you, as the grantor, transfer your assets into an irrevocable trust, you relinquish all control and ownership over them. It also means that once you name the trustee and beneficiaries, and set the terms and conditions of the trust, it is fixed.
Irrevocable trusts have their benefits in the form of greater asset protection and tax efficiency. However, there are also some disadvantages of an irrevocable trust.
Irrevocable trusts are specifically designed to be difficult to change. Typically, the consent of all the beneficiaries is required to change the trust.
There may also be certain laws and regulations which need to be followed to change the trust, depending on the jurisdiction and type of irrevocable trust.
The grantor should understand the severity and not assume that they would be able to change or revoke the trust.
The rigid nature of irrevocable trusts can be a benefit when it comes to asset protection, but it has the drawback that the grantor and beneficiaries may not be able to adapt to changing situations.
Once the grantor has transferred their assets into an irrevocable trust, they relinquish all ownership and control over them. The assets are then officially owned and controlled by the trust itself as a separate entity.
The fact that these assets no longer form part of the grantor’s personal estate can be beneficial in certain situations, but it also means that the grantor is unable to reclaim those assets if a personal financial crisis arises.
There is also the danger that the grantor’s relationship or feelings towards the designated beneficiaries changes, and they would prefer to remove them, but would be unable to do so.
For these reasons, the grantor should be certain about their circumstances before entering into an irrevocable trust agreement. However, this is not always possible because life is full of unexpected surprises.
Many choose irrevocable trusts because they often offer greater tax efficiency. The fact that the assets are removed from the grantor’s personal estate means they no longer form part of their taxable income.
However, the taxable income earned by the trust must still be taxed separately from the grantor, and the tax rate may even be higher in some situations. Furthermore, there is added effort and fees involved in filing a separate tax return.
Irrevocable trusts are often much more complex than revocable trusts or other financial vehicles. They often contain complicated terms and provisions, that require a high level of expertise to understand.
These complex provisions are part of what makes them such highly secure financial vehicles but can be difficult for the layperson to navigate.
Irrevocable trusts can be extremely useful as part of an estate or asset protection plan. However, like all financial vehicles, they also come with their drawbacks.
It is important to be aware of these disadvantages and of the implications of entering into an irrevocable trust agreement.