A trust is a good way to leave assets to your children or other heirs because it avoids lengthy and costly probate court settlements, and in some cases can avoid or reduce taxes. There are two basic types of trust: revocable (or living), and irrevocable. A living trust can be changed during the lifetime of its creator or grantor. Assets can be added or subtracted, beneficiaries can be changed or provisions for distributions can be revised. An irrevocable trust cannot be changed. Its assets and distributions are locked in under the discretion of the trustee, named by the grantor.
Trust Agreement Governs Distribution
When the grantor or creator of an irrevocable trust dies, the trustee is bound to distribute money and other assets according to the provisions of the trust. Normally the grantor will specify how money is to be distributed, such as in a lump sum, spread over several years, or invested with proceeds going to trust beneficiaries. If the trust is silent, distribution is up to the trustee.
Living Trust Becomes Irrevocable
A living trust becomes an irrevocable trust on the death of its grantor. At that point, the revocable trust is finalized under the terms or last revision of the trust agreement. The trustee then is bound to distribute funds as specified in the trust agreement. If there is no specification, it is the trustee's job to decide how to allocate funds or other assets. Usually, the grantor will designate beneficiaries and specify distributions.
Death of Beneficiary
If a trust beneficiary dies before fund distribution, that share normally is allocated to the other heirs. If there are no heirs, and the trust makes no provision for such situations, the state law governing the trust will prevail. Those funds could revert back to the trust to be distributed among other beneficiaries, or could be distributed to the next of kin of the deceased beneficiary.
Trust Life Insurance Benefits
Irrevocable trusts often are used to get life insurance benefits without taxes. If a grantor makes a trust the beneficiary of a life insurance policy and dies within three years of that designation, which is legally a gift, the proceeds of the policy revert back to the estate of the grantor. In other words, the trustee loses control for distribution to trust beneficiaries. However, if the trust bought the policy in the name of its grantor, this three-year rule does not apply.
- The Money Alert: Revocable vs. Irrevocable Trusts
- Estate Street Partners: Revocable Trusts vs. Irrevocable Trusts
- Solid Funding: What Happens if Trust Beneficiary Dies
- Will & Trust Center: Irrevocable Trusts
- Cover Your Assets: All About Irrevocable Trusts
- North Carolina State University: Trusts
- Edwin A. Barnum: Wills and Trusts