As an estate planning attorney, I sometimes find that words I use in everyday conversation sound like legalese to the rest of the world. It’s important that I remember to translate those words that roll so easily out of my mouth into language that makes sense to a non-lawyer!
One such term that might require some explanation is “irrevocable trust.” We use both revocable and irrevocable trusts regularly in our practice to meet our clients’ goals. To explain it at its most basic level, once an irrevocable trust has been established, it cannot be changed.
Here are some examples of what it means to say that you can’t change an irrevocable trust:
- The terms of the trust cannot be changed.Suppose you create an irrevocable trust that says that the income from the trust can never be paid to you.Six months later, you change your mind – you want to receive the income from the trust.You cannot go back and amend (that’s legalese for “change”) the terms of the trust to say that you can now receive the income.
- Once you put something into the trust, you can’t take it back out.In other words, in the above example, you may say to yourself, “Well, if I can’t change the trust to give me the income, I want to take back all the assets that I transferred into the trust.”You won’t be able to take them back.You gave up control of those assets when you put them into the trust – they no longer belong to you.You can’t take them back.
- You can’t terminate (that’s legalese for “put an end to”) the trust.To continue our example, you may say to yourself, “Wow, I’m really sorry that I created this irrevocable trust.I just want it to go away.”In short, you can’t just “make it go away,” even if you were the person who created it.Once you’ve signed an irrevocable trust into being, you can’t take it back.
At this point, you may be asking, “Why on earth would I want an irrevocable trust?” There are several situations in which an irrevocable trust makes sense. Certain types of trusts have beneficial tax consequences for some people, for example. In our practice, we typically use irrevocable trusts to help people qualify for Medicaid or Veterans Administration benefits to help them pay for nursing home care. (Explaining exactly how we use irrevocable trusts in long term care planning will have to wait for a later blog article.)
In some ways, placing an asset into an irrevocable trust is not much different than giving the asset away – once you put something into an irrevocable trust, it no longer belongs to you. You can’t control what happens to that asset; the trustee of the trust controls it. On the other hand, putting an asset into a carefully-designed trust can be preferable to simply giving it away, because the trust terms (which you created) govern the use of that asset. If you give $50,000 outright to your nephew, you can’t stop him from using it to reserve a seat on the first manned mission to Mars. However, if you place $50,000 in an irrevocable trust whose terms direct the money be used for your nephew’s education, you can rest assured that the money will be used in a way that’s consistent with your goals.
Irrevocable trusts can be complicated, and as you can see, the results of creating and funding (that’s legalese for “putting assets into”) the trust have far-reaching implications that can be difficult to reverse. It’s important to consult an attorney who has experience using irrevocable trusts to help clients reach their goals.