What Is an Irrevocable Trust?
If you've amassed a respectable estate and want to protect it and control how it's disposed of, then you should think about setting up an irrevocable trust.
An introduction to trustsGenerally speaking, a trust is a legal fiction conjured up by lawyers and accountants. It allows one person, the settlor, to relinquish control of his or her money or assets to a trustee, who then distributes the money or assets to beneficiaries according to a predetermined schedule.
The key is the transfer of assets from the settlor to the trustee. This offers a variety of legal, tax, and estate-planning advantages that aren't available to a person who keeps assets in his or her own name.
All trusts, whether revocable or not, allow the assets therein to pass directly to the intended beneficiaries without going through the probate process, in which a court inventories a deceased person's property and settles ambiguities about how it should be distributed to heirs.
This is beneficial for two reasons. First, probate can be costly and time-consuming, particularly if there are disputes among heirs as to how the estate's assets should be divided between them. And second, the probate process creates a publicly available record detailing the deceased person's assets and the distribution thereof. If, for whatever reason, you don't want this information disclosed, then a trust is the most effective way to preserve anonymity.
Revocable vs. irrevocable trustsBeyond probate, there are clear advantages and disadvantages to both revocable and irrevocable trusts.
The biggest advantage of a revocable trust is simply that it's, well, revocable. For instance, let's say you want to set aside money for a ne'er-do-well grandson with the hope that he reforms his behavior as he matures. By using a revocable trust, you earmark the assets or money that you want to set aside for him, but you also leave yourself the option of revoking the trust if he doesn't eventually come around.
An irrevocable trust, on the other hand, doesn't give you this same flexibility. But what it does give you is a host of offsetting benefits. Most importantly, because the trust is irrevocable, any assets transferred into it are no longer considered to be the settlor's property. The net result is that not only are they protected from a settlor's legal adversaries and creditors, but they're also exempt from federal and state estate taxes.
Setting up a trust is easyIf you're interested in setting up a trust, the good news is that it's easy to do. You theoretically don't even need to put the arrangement down on paper for it to be legally enforceable.
Once again, the key is the transfer of control over assets to a person acting as a trustee on behalf of a beneficiary. If you give, say, $25,000 to a person and tell that person to hold it in trust for another person, you've created a trust.
Moreover, not only can the settlor and the trustee be the same person, but certain states also even allow a trust's settlor to be its primary beneficiary (though, in this instance, known as a "self-settlor" or "spendthrift" trust, there must be a separate trustee).
This isn't to say that you shouldn't hire a lawyer to assist in the process -- and, specifically, to prepare the trust document, which governs how the assets therein will be distributed. Not only will a lawyer ensure the entity is legally enforceable, which could save you and/or your heirs money down the road in the event of a legal dispute, but they can also help you decide which assets to put in the trust and how to design the distribution schedule to maximize legal and tax benefits.
Either way, trusts are easy to set up and offer an array of financial and legal protections that can shelter your hard-earned assets during your lifetime, in addition to ensuring that your legacy lives on when you're no longer around.
The article What Is an Irrevocable Trust? originally appeared on Fool.com.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.