Ahh, an Irrevocable Trust? What is it anyway? As I discussed in a previous post, there are many types of trusts. We covered Irrevocable Trusts a bit, but I thought I would do more of a deep dive into them today. First, let’s define a few terms to make things a bit less confusing.
Learn the Trust Terms
Settlor: This is the person who creates the trust. Sometimes you may see them called the trustor, donor, grantor, or even the trust maker. This is the person who wants the trust as part of their Estate Plan in Minnesota. Therefore, if you are reading this, it is probably going to be you. Anytime I talk about it, I will use “settlor.”
It does not mean the attorney who drafts the trust document, and it is not necessarily the trustee.
Trustee: This is the person, persons, corporation, bank, or trust company that administers the trust. Often, a settlor has a competent or trusted friend act as the trustee. It doesn’t mean your best friend; it should be someone you believe can handle the administrative responsibilities involved in managing the trust.
Beneficiary: As you may have guessed, this is the person or persons named as a recipient of the property or funds within the trust.
What is an Irrevocable Trust?
These trusts are often referred to as an “Irrevocable Life Insurance Trust” or an “ILIT.” This trust may hold one or more life insurance policies, but it is not required. The trust can have any other property types, and annual gifts may be made to the trust. Typically, the trust benefits the settlor’s spouse and descendants. The settlor of an Irrevocable Trust transfers the title of property to the trust and gives up ownership of that property.
Why use an Irrevocable Trust?
Irrevocable Trusts are created for gift and estate planning tax purposes. Because the trust is an entity that holds title to the property, insurance policies, and money, it prevents those assets from being included in the settlor’s gross estate. Therefore, these are typically used by people approaching the federal and Minnesota estate tax limits or those needing medical assistance.
The trust allows the settlor to pass assets to the beneficiaries without paying estate taxes and does not require selling, liquidating, or terminating their assets.
There are, however, several disadvantages of an Irrevocable Trust.
Disadvantages of an Irrevocable Trust
Irrevocable Trusts, by their nature, are complex. They are difficult to administer, prepare properly, and successfully manage. Assets cannot be returned to the grantor, and the trust agreements can be difficult to amend. Professional fees, administrative costs, and tax issues make them cost-prohibitive.
With the difficulties in administration, the settlor should consider hiring a professional to administer the trust. This professional can maintain proper records, provide notices where required, maintain accounts, track gift taxes, and file taxes as necessary.
How to create an Irrevocable Trust
As stated, certain formalities must be followed in creating the Irrevocable Trust. The trust document must be drafted, assets must be transferred into the trust, and you must obtain a Tax ID number for the trust.
Most likely, you will have to hire an attorney to draft the trust document. The document must explicitly state it is an irrevocable trust, name a trustee, and name beneficiaries.
Summing Up Irrevocable Trusts
Irrevocable trusts are created during the settlor’s lifetime to remove property from their taxable estate and protect property from the beneficiaries’ creditors. These are often called irrevocable life insurance trusts or ILITs.
The ultimate goal is to avoid estate taxes at death by moving the settlor’s property into the trust without liquidating any of their property. These trust agreements are challenging to create, administer, and maintain, so it’s recommended to employ the services of professionals to avoid problems down the road.
Because of the costs involved in an irrevocable trust, it may not be the right solution for everyone’s estate plan. Talking to a professional can help you understand your options. Feel free to call Nobleheart Legal at 612-208-7780 or visit our contact page to get in touch.
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