Pros & Cons of an Irrevocable Trust

by Tom Gresham, Demand Media

    An irrevocable trust is an account that holds assets, such as securities or cash, and distributes funds from the assets to a designated beneficiary or beneficiaries. If you set up an irrevocable trust, you deposit assets into the trust, and you relinquish ownership and control of those assets. A trustee selected to manage the trust becomes the legal owner of the assets. An irrevocable trust arrangement has both major benefits and potential pitfalls.

    Estate Tax Benefits and Creditor Protection

    Those interested in irrevocable trusts often look to the format to help ease the impact of estate taxes on their heirs. The grantor -- the person who establishes the trust and supplies the assets to the trust -- no longer owns those assets. Therefore, the assets are not considered part of the estate when the grantor dies and leaves an inheritance.
    The reduction in assets can serve to drop the size of an estate below thresholds that trigger estate taxes, or to reduce the amount of assets that might be diminished by estate taxes. Also, sacrificing control of your assets means they become inaccessible to creditors, because you no longer legally own them.

    Control Benefits

    Irrevocable trusts offer a benefit in estate planning because they allow you to direct how a defined group of assets will be disposed of after you die. The grantor determines the conditions under which the assets in the trust will be distributed to a designated beneficiary or beneficiaries. If you are a grantor, this allows you to establish not only the recipients of the assets in the trust, but also to decide when they will receive them. A grantor can designate several beneficiaries, including both people and organizations, and she can define how they will receive income from the trust.

    Control Pitfalls

    A major limitation of irrevocable trusts is that you relinquish ownership and control of your assets after the trust is formed, even though you set the conditions for their use. Once an irrevocable trust is formed, the trustee appointed to oversee the trust becomes the active manager of its assets.
    A trustee is obligated to operate the trust based on the conditions that formed the trust. This means the trustee must act in the best interests of the trust and its beneficiaries, and not in the best interests of the grantor. If you established an irrevocable trust, you cannot turn to those assets in an emergency.

    Revising or Revoking Trust

    Another potential downside of an irrevocable trust is that neither the grantor, nor the trustee or beneficiaries, can amend the makeup of the trust or revoke it once it has been established. Participants cannot choose to add or withdraw sets of assets from being part of the trust, and they cannot add or remove beneficiaries.
    The finality of the arrangement suggests that if you are considering setting up an irrevocable trust, it is important to be certain about how you want the assets handled.

    About the Author

    Tom Gresham is a freelance writer and public relations specialist who has been writing professionally since 1999. His articles have appeared in "The Washington Post," "Virginia Magazine," "Vermont Magazine," "Adirondack Life" and the "Southern Arts Journal," among other publications. He graduated from the University of Virginia.