Best Practices for Irrevocable Trusts

Posted by Cheri Dorsey in Beneficiaries, Estate Administration & Probate, Estate Planning, Tax Planning, Trusts
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Sometimes, we are approached by prospective clients who wish to make changes to their irrevocable trusts—unaware that under current law, these trusts cannot be easily amended. In fact, modifying the agreements of an irrevocable trust, unless under very specific conditions, is a violation of state and/or federal law.

As the current administration seeks to increase funding for the Internal Revenue Service, the last thing we want to see is our clients getting in hot water simply because they were not fully aware of the terms of an irrevocable trust they established. Below are just a few considerations to keep in mind for those considering establishing and funding an irrevocable trust.

Understanding the Fundamentals

Often, when individuals utilize trusts in their estate plan, they do so to avoid certain estate taxes and/or the public disclosures required in the probate process. One primary benefit of an irrevocable trust is the protection it can offer your assets from creditors. However, there is a tradeoff when gaining this creditor protection.

Unlike a revocable trust, an irrevocable trust involves the transfer of asset ownership from the grantor to the trustee for the benefit of the beneficiaries. Irrevocable trusts are difficult to amend or modify because the grantor releases the legal ownership of the transferred assets after the final agreement is signed, the trustees are often limited by the powers granted to them or by their fiduciary role, and the beneficiaries do not have actual ownership rights over the trust property. It is this release of ownership by the grantor and the division of the incidents of ownership between the trustees and beneficiaries that creates the asset protections of irrevocable trusts.

Another reason why people are drawn to irrevocable trusts is related to the ability to remove assets from a person’s taxable estate. While the current federal exemptions are significant, the partisan nature of tax law means that exemption amounts for gift and estate taxes can change dramatically in concert with a change in administrations.

Timing is important when planning for irrevocable trusts, as an increase or decrease in tax exemptions affects your ability to make tax-free gifts.

How Can I Amend an Irrevocable Trust

Under Maryland law, changes can be made to an irrevocable trust only after written agreements from all “interested parties”. This means that any modification to an irrevocable trust requires the consent of all parties involved in the agreement including certain future beneficiaries.

For many, the most difficult part of amending their irrevocable trust may not be the participation of a judge or an appearance in court (which may be completely avoidable), but convincing their current and future beneficiaries to agree to any new conditions. When the trust owns significant assets and has steady income streams, conflicts may develop between the various beneficiaries and the grantors of the trust, especially when multiple parties and different generations are involved.

For those planning an irrevocable trust, considering the input of your beneficiaries at the early stages is important. Outlining the details of the trust and sharing your goals and concerns will likely help your beneficiaries develop a greater understanding of their role in the process and could ease any modification process if you desire to amend the trust later down the line.

Explore Your Options

Should you require greater flexibility in your trust, a revocable trust may be a better option. Unlike an irrevocable trust, revocable trusts allow the grantor the ability to add or remove beneficiaries, as well as assets and properties from the trust throughout their lifetime.

Bear in mind that revocable trusts do not provide the same protections from creditors during the life of the grantor and they become irrevocable once the grantor passes away or otherwise becomes unable to act as a trustee.

Depending on your situation, a combination of revocable and irrevocable trusts which take into account the needs and goals of separate beneficiaries may be the best strategy. Typically, people will utilize revocable trusts for assets that are currently needed, or which may require more flexibility for future decisions and irrevocable trusts for assets with which they are comfortable parting and treating as a gift for their beneficiaries.

Talk With an Estate Planning Attorney Today

Depending on what your objectives are, both revocable and irrevocable trusts provide benefits as well as drawbacks. Keep in mind that the tax-saving strategies of an irrevocable trust are often hindered by timing and circumstance

The right estate planning attorney will be able to help guide you to a more informed decision as to whether and when an irrevocable trust is the right option for you and your family. Remember to include your beneficiaries in the discussions as early in the process as possible, as the framework for your trusts can affect their lives as much as, if not more than, your own.

If you are interested in exploring the benefits of a trust, either revocable or irrevocable, reach out to an estate planning attorney today.

At Sessa & Dorsey, we consider the bigger picture at hand and advise our clients on the best trusts for their specific needs and desires. If you have questions about estates and trusts, please contact us at (443) 589-5600.

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