What is an Irrevocable Trust Agreement?
The purpose of an Irrevocable Trust Agreement is to allow for a trust arrangement where the person who creates the trust (the grantor/trustor/trustmaker) gives up the right (irrevocably) to change or alter the trust terms without the consent of the beneficiary. The person who benefits from the trust assets is known as the beneficiary.
The assets transferred into the Irrevocable Trust Agreement become trust property once they are transferred and are subject to the terms of the Irrevocable Trust Agreement. The attached property Schedule A explains the property that will be transferred into trust upon the death of the grantor; however , property transfers can occur prior to the grantor’s death. If the property needs to be transferred into the trust but has not yet been transferred, the Grantor will sign a separate Assignment of Property in trust.
In this type of trust, the trust income does not go directly to the grantor. Instead, the income will either be distributed, or remain in trust for the benefit of the beneficiary. This trust should have a trustee; the trustee’s role is to manage the trust and disperse trust income and principal according to terms of the trust. The grantor may choose to be the trustee himself/herself, or another person (i.e. the trust beneficiaries) or a financial institution, or another fiduciary.
Essential Elements of an Irrevocable Trust Agreement
An irrevocable trust agreement is a binding legal document between the trustee and the beneficiaries of the trust, setting out the specific terms of the relationship. As a legally enforceable document, when it comes to the administration of the trust agreement, the trustee is bound by the terms of the agreement—no action outside what is specified in the trust agreement may be taken.
While the specific language may vary slightly from state to state, the key components of an irrevocable trust agreement include:
Parties: generally, the parties to an irrevocable trust agreement are the setting grantor, the trustee, and the beneficiaries.
Setting Grantor – The setting grantor is the party that sets up the trust agreement. Setting grantors are also known as the trustor or the grantor.
Trustee – The party who manages the administration of the trust and sees to its objective and purpose is called the trustee. A trustee can be any person who is competent under law to execute such a task; however, in some cases, if the settlor has not named a trustee in the agreement, the court can appoint one.
Beneficiaries – The beneficiaries of the trust agreement are the parties designated to benefit from the trust. While the beneficiaries are not parties to the trust agreement, the trustee must regularly make payments to the beneficiaries under the terms of the agreement.
Irrevocable Trust Agreement Transfers
As a general rule, during his or her lifetime, an irrevocable trust will not permit the transfer of interest, except under the following circumstances:
Trusts also provide for a replacement trustee, which appoints a new party in the event the original trustee is no longer able to see to the trust’s affairs, such as in the case of death, incapacitation or other circumstances. A successor trustee can only be appointed under the terms of the trust agreement or by court order.
Advantages of an Irrevocable Trust
One of the primary advantages of using an irrevocable trust is that it provides a high level of asset protection. Since the assets held in such a trust are owned by the trust itself, not the client, creditors cannot claim them to satisfy your debts. Additionally, since these assets do not belong to you, these assets may not be subject to the estate tax when you pass away.
When it comes to estate taxes, in particular, the irrevocable trust may be useful for minimizing the potential tax bite. If an individual gives away a sum of money ($5million for example) into an irrevocable trust paying $100,000 annually to each named beneficiary, then each beneficiary is taxed on the annual distribution as income. However, since that trust principal is not considered to belong to the Grantor or beneficiaries, the $100,000 payment is not subject to death tax.
A third advantage to using an irrevocable trust is the level of privacy it affords. Because an irrevocable trust is a separate entity in and of itself, interested parties cannot track its annual value as they could if these assets were owned by you personally. Thus, the amount of a person’s wealth is kept private through the irrevocable trust.
Common Applications of Irrevocable Trusts
There are a number of different ways to use an irrevocable trust. Some of the most common uses include:
Asset Protection
There are a number of reasons why you might want to protect something with a trust. If you are in business, you may want to protect the assets in the business from being vulnerable to your personal creditors. A trust can provide this protection in many cases, though which trust is right for you will depend on your particular situation. Trusts can protect assets in the case of divorce or death as well. If you’re in financial trouble, a trust can also provide some protection from creditors.
Medicaid Planning
In the past, in order to qualify for Medicaid, you would be required to spend down all of your assets except for a very small amount. Now, however, it is possible to keep some portion of your assets intact by putting them into an irrevocable trust. This is often the case in Medicaid planning. By placing your assets into an irrevocable trust, you can qualify for Medicaid to help pay for nursing home care and senior housing.
Beneficiary Designations
Sometimes you’ll need to make some designations as to who will inherit those assets. On that occasion, you can fill out a beneficiary form and submit it to your bank or fund administrator. However, there are some third party accounts that require a trust in order to be properly inherited by someone other than the original account holder. In these cases, you can use an irrevocable trust agreement and submit it to the administrator.
Charitable Organizations
Trusts are frequently used by charitable organizations to manage their funds and assets, and this can benefit you as well. A charitable trust, for example, is one way to get tax deductions if you set aside money that can only be used for charitable causes. Where the IRS classifies these trusts as irrevocable, the income generated from the assets in the trust is usually tax exempt.
Creating an Irrevocable Trust Agreement PDF
Creating an irrevocable trust agreement in PDF format is a simple process that ensures the document can be preserved digitally for further electronic sharing and accessibility in the future. Follow these simple steps to create an irrevocable trust agreement in PDF format:
- Open Microsoft Word
- Select "File" from the top left of the window
- Click "Print"
- Select "Microsoft Print to PDF"
- Click "Print" in the lower right corner of the window
- Name your file and select where you would like to save it
- Click "Save"
It’s important to note that the process for saving a document in PDF format may vary slightly if you are using a different word processor or software program, for example, Apple Pages or Google Docs . In the case that you cannot get Microsoft Print to PDF to work for you, there are a number of free online PDF converters that allow you to upload your agreement and download it in PDF format. However, always read the fine print when using a free online PDF converter to make sure that your trust agreement will remain private.
Creating an irrevocable trust agreement in PDF format is the simplest way to create a legally binding agreement that incorporates digital records, allowing any computer to access it, while also creating a permanent record of the agreement on the cloud.
Pitfalls and Precautions
While the initial advantages of an irrevocable trust are well-understood, what remains unclear to many is the potential shortcomings of the arrangement and whether an irrevocable trust agreement PDF is appropriate.
Because the assets involved are no longer your personal assets, you will no longer receive any income such as interest from the accounts or property sold in the trust agreement. While you will no longer be in possession of the property, the IRS will consider the sale and a capital gains tax will need to be paid. Additionally, once the trust agreement is in place, you will no longer be able to modify in any way including distributions to be made in the future. That means that beneficiaries cannot receive distributions for school tuition, car payments, or anything else with the trust.
This may or may not be an issue to the trustee but it is absolutely something to consider. The trustee has full control over the trust agreement. That means you will not be able to tell the trustee how or when to make distributions. There may even be conditions applied to beneficiaries that are not fair, such as eliminating distributions for a teenager until they reach a certain age.
Because these matters are discussed after the fact, there are some costs incurred to create and maintain these documents. A good irrevocable trust agreement PDF, however, may be worth it in the end. The complexity of your estate will determine how much it will cost but this is one of the reasons to hire experienced lawyers to draft this type of document. Because the trustee is a separate entity, all of the expenses associated with the trust are typically the responsibility of the trustee.
You should also consult your lawyer about the estate taxes involved. It is important to understand what may happen with your estate when you pass away, but many states have an inheritance tax in place if the assets are moved outside of the property owned by the deceased.
If not properly drafted, there is a significant risk of further lawsuits or other legal problems down the road. If you fail to include necessary statements in the irrevocable trust agreement, then it may be contested later. It is important to note that wills, in most cases, need to be approved or validated by the courts so this applies only to some situations. This can take years to unfold as well, which can add to your stress and also cost your beneficiaries money.
Finally, although not too common, there is the possibility that beneficiaries may claim that they were not treated equally and or that your valid wishes were not followed. You may state certain things in the documents, but not everyone will agree. If there is any possibility of sibling disagreements, it is important to mention this with an experienced lawyer before drafting the document to avoid any issues later on.
Templates and Legal Help
Templates for irrevocable trust agreements in PDF format can be found through a number of reputable sources. Many legal publishers offer downloadable PDFs of common legal documents, including irrevocable trust agreements. These templates can be either free or available for a small fee. In addition to online resources, libraries at law schools or courts often have access to legal databases where documents like the PDF of an irrevocable trust agreement can be downloaded. Of course, if you prefer meeting with a lawyer, most attorneys will provide a paper copy in PDF form as part of their services.
While templates and examples are a good place to start, a trust is a complex legal mechanism that should be drafted with precision. The consequences of an improperly placed comma can have significant implications for a trust, making it very important for an irrevocable trust agreement to be drafted carefully. A trust needs to be able to meet specific standards based on factors like the state or country where the trust is located. For example , some trusts need to have a trustee who lives in the state where the trust is created. However, other places do not have such a requirement.
A lawyer is also helpful because the person establishing the trust needs to understand how the arrangement works. Irrevocable trust agreements should not be created in a vacuum where the person establishing the trust does not know how the instrument operates. A lawyer can explain the process of setting up a trust, the types of documents needed and even what needs to happen after the agreement is established.
Creating an irrevocable trust agreement can help establish succession plans for individuals. Topics such as trusts for minors, handling disability and caring for family members are all important issues that trust agreements need to address. A lawyer can tailor the trust based on your needs and provide you with either a printed or digital copy as you request. Although there may be no cookie-cutter approach to setting up a trust, an attorney can provide you with information that helps you make decisions about your estate plan.
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