Establishing a trust is one of the easiest and most powerful ways for you to make sure you have control over the distribution of your assets, even after death.
Put simply, a trust is a way to control property—who owns and manages it, and how it is handled and distributed.
A trust is defined the the relationships of the people involved in the trust. Every trust has a grantor, trustee, and beneficiary.
The grantor is the person who puts the property into the trust.
The trustee is the person assigned to manage the property in the trust.
The beneficiary is the person who benefits from the property in the trust.
A trust can be revocable—meaning the grantor who puts the property in the trust can also take it out or change the provisions, or irrevocable—meaning the grantor who puts the property in the trust cannot take it out or change the provisions.
A revocable trust would be like putting your money in a box to be used later as you please. An irrevocable trust is like a vault where you put your money in then give the keys to someone else with instructions on what to do with the money. And you don't ever get the money back (unless the trust buys something of value from you—but you don't get to decide whether the trust purchases something from you, the trustee does).
Why would I want my property in an irrevocable trust?
It sounds scary to put your property in a trust knowing that your wishes at the time of trust creation are irrevocable. And irrevocable trusts are not appropriate in all circumstances. However, an irrevocable trust provides estate tax benefits, shields the assets in the trust from creditors, and are very useful to provide for family members who are financially irresponsible, have special needs, or are still minors.
How do I create an irrevocable trust?
The creation of a trust is as simple as drafting a written agreement. And as complex as drafting a written agreement. In it, at a minimum, the grantor names a trustee, identifies the beneficiaries, and outlines instructions for how the trustee should distribute the property. It should also plan for contingencies, including death of the beneficiaries.
Once the trust is created, the trustee has duties of loyalty and duties to act in good faith (fiduciary duties) to use prudence in investing and protecting the assets in the trust. He or she must also follow the instructions in the trust.
Anyone can serve as trustee except the grantor. Often the trustee is a trusted family member or friend, but in some cases grantors prefer to have a professional or institution act as trustee. There can be more than one trustee for a given trust, and if there are more than one, they are co-trustees.
Anyone can be a beneficiary of an irrevocable trust except the beneficiary.
Benefits of creating an irrevocable trust
Making a gift while you are alive (this includes life insurance proceeds, which are paid for when you're alive but transfer upon death) excludes the gift from the taxable value of your estate when you die. But in many circumstances, you may not want to give a lump sum to the beneficiaries. A trust is a way to gift the money, save your estate the estate taxes, and provide parameters for asset distribution.
Besides the tax benefits, the irrevocable trust also protects the assets from creditors of the grantor. Assets that are transferred to the trust are no longer executable because they do not belong to the grantor. Creditors of the beneficiary of the trust can only execute on the assets once they have been transferred to the trust to the beneficiary.
There is also an instrument called an irrevocable life insurance trust, or ILIT, which you can read about here.
A charitable remainder trust is another kind of irrevocable trust, which you can read about here.