Who Receives Money from an Irrevocable Trust After a Person Dies?

by Bob Haring, Demand Media

    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.

    About the Author

    Bob Haring has been a news writer and editor for more than 50 years, mostly with the Associated Press and then as executive editor of the Tulsa, Okla. "World." Since retiring he has written freelance stories and a weekly computer security column. Haring holds a Bachelor of Journalism from the University of Missouri.