What Is An Irrevocable Trust?
An irrevocable trust is a trust wherein the grantor, also known as the trust maker, agrees to give up some control of his or her property that is placed into a trust. In some cases the grantor decides to give up all control and all benefit of the trust and the property placed therein. That type of irrevocable trust is sometimes used to plan for inheritance taxes. Most people, however, are not willing and able to give up all of the control over their trust. These people can give up less control. Let me give you an example. If I have a particular asset, perhaps a rental property, that I wish to set aside for my daughter’s education, and if I wish to protect that property for that use even if I were to suffer a grave illness or a devastating lawsuit, I may deed that rental property into an irrevocable trust for the benefit of my daughter’s education. I may, however, wish to have the ability to change the beneficiary in case my daughter decides not to go to college. In that event, I may wish to designate my grandchildren as the beneficiaries so that they may have the same asset set aside for their college education or health needs. In that event, I may choose to give up the right to spend that money on myself, or for myself, but may retain the right to designate a different beneficiary if life turns out in a way that did not meet my plans and expectations.
Let me give you another example. If I have multiple children, I may begin my trust planning with the expectation and the decision that my children will eventually share equally in the assets that I put into my trust. As time progresses, that plan may have to change. If one of my children passes away, and another of my children becomes incapacitated, I may not want those children to inherit and therefore I will want to be able to provide amendments to the distribution portion of my otherwise irrevocable trust. This is possible, even advisable.
What Are The Benefits And The Limitations To An Irrevocable Trust?
A properly drafted and managed irrevocable trust can assure that the assets funded into this trust are protected for the beneficiaries that you have designated. Further, an irrevocable trust is not generally going to be subject to probate proceedings and will pass on to the beneficiaries more quickly and less expensively than the assets that are subject to probate. Another benefit of an irrevocable trust is that you can decide in advance who will be in charge of it, where the assets will go, when those assets will go to that person or charity, and you can do all of this without the permission of the court. You may not, however, fund an irrevocable trust when the assets are already subject to creditor claims. Let me give you an example. If I were to have a terrible car wreck and cause great damage to the other drivers, it would be too late for me to then create an asset protection trust and start putting my assets into the name of that trust. The facts that create a claim or a lawsuit already exist and any transfer to the trust at this time will probably not be upheld by the court and therefore will not save the assets. To say it another way, you have to create your irrevocable trust and put your assets into it before there is any known or knowable problem. Otherwise, the transfer into the trust will likely fail.
What Are The Benefits And Limitations To A Revocable Trust?
A revocable trust is an excellent vehicle to avoid probate and can will also help avoid the cost of guardianship proceedings. This can represent a substantial financial saving to your heirs and beneficiaries. With the revocable trust you will also get to appoint the trustees of your own choosing just as you may in your irrevocable trust. Your trustee appointment is not subject to the approval of the court. Conversely, in probate the court will give great weight to your nomination but is not bound to follow it. The revocable trust also has the benefit of being completely flexible. You can add property to the trust, take property out of the trust, even cancel the entire trust and go forward without it at all. You are entitled to give the money to yourself, spend it on the person or persons of your choosing without regard to whether you anticipated that possibility in advance. The revocable trust limitation is that it offers no asset protection. The assets in your revocable trust remain subject to your liabilities such as nursing home care, lawsuits, divorce, and other lawful claims.
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