Done right, irrevocable trusts are powerful estate and business planning tools that accomplish a variety of goals. But what are they, really? And once formed, are they well and truly irrevocable?
The Nuts and Bolts of the Irrevocable Trust
The first step in understanding irrevocable trusts is knowing what people mean when they refer to a trust – revocable or irrevocable. Some people have difficulty understanding trusts because a trust is not a tangible thing. You can’t touch it or hold it. A trust is actually a legal entity that is controlled by a trust agreement, which is a written document setting forth all the terms of the trust, including how it is administrated.
To understand how a trust works, it helps to think of the trust as a box. When someone creates a trust, he or she puts property in the box (the trust) for the benefit of someone else. The person who creates the trust is called the maker or the grantor. The person or people who benefit from the trust are called the beneficiaries. Finally, the person who oversees the trust and its administration is called the trustee – and there can be more than one trustee as well as successor trustees who take over upon the death of the original trustee.
In a revocable trust, the trust maker can serve in all three roles: he can make the trust, name himself as a beneficiary, and serve as trustee. In fact, many people do just that.
With an irrevocable trust, however, the trust maker must cede control of the trust to someone else. In most states the maker can’t serve as trustee. Additionally, most states do not protect irrevocable trust assets from creditors if the grantor names himself as a trust beneficiary. For this reason, most irrevocable trust makers do not name themselves as trust beneficiaries. However, Missouri is one of a few states that has adopted a statutory framework that offers the trust maker a few options in this regard.
The Benefits of an Irrevocable Trust
Irrevocable trusts come in a variety of flavors and serve many different purposes. In most situations, people use them to remove assets from the reach of creditors or to remove the assets from their estate for estate tax purposes. When you create an irrevocable trust, you no longer own the assets you place in it – the trust does which is then controlled by a third party Trustee. This prevents creditors from getting at the property within the trust. Irrevocable trusts are also useful for minimizing state and federal estate tax or providing for a disabled person with special needs.
Is an Irrevocable Trust Really Irrevocable?
The term “irrevocable trust” is a bit of a misnomer, because there are certain circumstances under which an irrevocable trust can in fact be modified. In Missouri, trustees can take advantage of the “decanting statute” that permits the trustee of an irrevocable trust to pour (like pouring wine, hence the term “decanting”) all the assets of an existing irrevocable trust into a new trust for the benefit of the trust beneficiaries. Similarly, a trustee can modify or terminate an irrevocable trust if the trust agreement confers the authority to do so.
Call for More Information
Irrevocable trusts are complex legal matters that require careful planning and a thorough understanding of Missouri trust laws and state and federal tax laws. To discuss your irrevocable trust needs with one of our knowledgeable attorneys, call our office today at 417-841-2775.