When a grantor dies, the irrevocable trust continues to exist with the trustee managing assets, distributing income, and passing everything along to the beneficiaries. This is the point of a trust, that it can continue as outlined, even after the grantor passes away.
If it were a revocable trust, that process would be straightforward and easy to navigate. However, an irrevocable trust has more nuance in its continued existence. And of course, no trust is the same. But in this article, let’s clear up how an irrevocable trust works, what happens when the grantor dies, and how to manage the trust after they’ve passed away.
How an Irrevocable Trust Works
An irrevocable trust is a specific type of legal tool where the person who establishes it surrenders control over whatever assets are put into the trust. Unlike a revocable trust, once the assets are moved, the grantor may not alter or end the trust without consent from the beneficiaries.
So create a trust like this? The benefits of the irrevocable trust provide major advantages for estate planning, asset protection, and taxability.
One of the most distinctive aspects of an irrevocable trust is that it takes assets out of the grantor's estate. This, in turn, makes the assets not subject to estate taxes at the grantor's death which could result in large tax savings.
In addition, this type of trust is built to shield assets from creditors and other legal judgments offering greater financial protection for the beneficiaries of the trust. Irrevocable trusts may also factor into a Medicaid planning strategy, potentially helping individuals qualify for benefits while protecting assets they wish to pass on to descendants.
What is an Irrevocable Trust?
As the name implies, an irrevocable trust is a trust that cannot be changed in any way or revoked by the grantor once it has been created. The assets are transferred to the trust by the grantor in perpetuity, which then obtains a separate legal identity.
The trust is then administered by the trustee, who is legally responsible for fulfilling the criteria laid out in the trust deed. This document spells out exactly how assets are to be dispersed to beneficiaries. This act is pretty much permanent, creating a clear path for how to manage assets, even after the original grantor does.
The irrevocable trust is frequently used for estate planning, charitable giving, and Medicaid planning. And for individuals with a net worth over $10 million, the irrevocable trust makes the most sense.
These trusts can own different asset classes, like money and real estate investments, making sure those assets are managed according to the grantor's desires. You can also create particular objectives within the trust like caring for an individual with special needs without disqualifying them from government aid. You can also use an irrevocable trust to pass on assets through charitable contributions after the grantor dies.
The Key Players in an Irrevocable Trust
You essentially have several important roles within the irrevocable trust: a grantor, a trustee (or more than one), and beneficiaries. Most trusts also have a team of professionals to manage and upkeep the trust.
Grantor:
The person who establishes the trust and then transfers assets to it. The grantor selects terms of trust and identifies a trustee.
Trustee:
The individual (or business) tasked with managing the trust's assets. The trustee has to distribute those assets exactly as the grantor specifies in the trust document. The trustee is required to act exclusively in the interests of beneficiaries. They must make prudent investment decisions, keep accurate records, and communicate with beneficiaries regarding the state of the trust.
Beneficiaries:
The persons or entities who receive the benefits of the trust. The trust agreement dictates their rights to the assets and distributions. Beneficiaries may include family members, friends, and charitable organizations.
Professionals:
Irrevocable trusts can also include professionals like attorneys, tax professionals, and financial planners. Their specialized skills can be used to help manage difficult situations, especially when it is a trust with substantial assets or if there are complicated family arrangements.
The Importance of The Grantor In An Irrevocable Trust
The irrevocable trust is established by the grantor. They create the trust to set out how the assets are managed and distributed. When the assets themselves have already been transferred to a trust, the grantor has no legal claim over them though they still control quite a bit of how the trust operates.
Duties of the Grantor
The grantor's duties are to establish the agreement, name the trustee, and choose who will get money through this process. And once that’s all decided, the grantor funds the trust, which means properly changing the titles of assets to the trust. In doing so, the grantor no longer legally owns the assets.
The grantor should maintain clear communications with trustees and beneficiaries about what the trust is supposed to do and when. Because should the grantor die or become incapacitated, everyone should know exactly what happens with the irrevocable trust.
Control by the Grantor Over the Trust
Even after creating an irrevocable trust, the grantor still maintains some control. This could involve going into specific circumstances, such as when and where assets are to be distributed and what to expect from the trustee. But once the trust has become operational, alterations are nearly impossible. It’s important to get things right from the start.
The grantor usually chooses a successor trustee to serve if the initial trustee becomes unable to act. This is so that if both the grantor and the trustee die, the successor trustee can take over the management and distribution of the assets within the irrevocable trust.
Impact of the Grantor's Death on the Trust
When the grantor of an irrevocable trust dies, a very important shift takes place. Because the trust is separate from the grantor's estate, what happens after the grantor dies hinges on specified terms within the trust document.
Immediate Impacts on the Irrevocable Trust
Upon the death of the grantor, the trust takes effect and whatever rules are written on that trust document govern the next steps. The trustee is responsible for the management of trust assets per these terms and distribution to beneficiaries in accordance with these terms.
Typically, an irrevocable trust is written in a way that the grantor dying makes it easier to transfer assets into the beneficiaries' hands without having to go through probate. This includes making it easier for beneficiaries to access funds and property sooner. This means that they may not have to wait for the probate process to wrap up. This can help them feel financially secure at what is likely a difficult time.
The Trust in the Long Run
Can you change a trust when someone dies? If it’s an irrevocable trust, then it can’t be changed after the dies dies. But can you set up a trust after someone dies? Again, with the irrevocable trust, you don’t have the option to make any changes after the grantor’s death.
Over time, however, the trust administration and beneficiary benefits can be impacted by the death of the grantor. Some trusts require the trust to distribute income or principal on a regular basis at least annually. Other trusts only distribute upon request by a beneficiary. Still other trusts provide for a complete distribution from the trust upon the grantor’s death.
You should also remember that irrevocable trusts usually have tax consequences on the beneficiaries. A trustee must navigate these tax rules carefully in order to comply with the IRS, but also to create an advantageous circumstance for the beneficiaries.
Relationships between beneficiaries can change over time after the death of the grantor. Tensions can grow within relationships if people think that the provisions of the trust are not fair. In these cases when disputes arise, it might require mediation or even legal action.
To avoid nasty scenarios like this, trustees need to be committed to providing accurate and timely reports about the health of the trust. This includes periodic reviews of investment strategies, income distribution schedules, and asset distributions.
It’s the right of a trustee to engage appropriate professional advisors like financial planners or tax consultants to deal with the complex issues that happen after the death of a grantor. While this proactivity protects the trust's assets, it also restores confidence in how the trust.
Trustee’s Responsibilities After The Grantor’s Death
After the grantor dies, the trustee is going to become even more important. The trustee is tasked with the complexities of administering the trust in a manner that fulfills the grantor's wishes.
Distribution of Assets
A key function the trustee you pick will serve after your death is to follow through on the terms of the trust and distribute assets to beneficiaries. This can include selling off assets as part of the process, paying debts, and keeping some investments to help increase the value of the overall trust.
Administering the Succession of the Trust
The trustee is responsible for the distribution of the assets, but is also charged with maintaining the trust and keeping it running. This includes choosing investments, managing taxes, and maintaining the irrevocable trust after the grantor dies. In everything, trustees must follow the terms of the trust and act in favor of the beneficiaries.
Trust management also has its own set of skills. You must balance the management of several complicated assets, as well as navigate the tricky situation of distributing those assets after the grantor passes away.
In addition, the trustee may have to stay abreast of market movements and economic conditions that might affect the trust's assets to improve its long-term health for beneficiaries. To help, trustees may find it useful to speak with financial advisors or attorneys.
Legal Issues Created By the Death of a Grantor
The legal terrain of irrevocable trusts can be confusing, especially when the grantor has recently passed away. To do so means taking into account a whole host of factors for navigating the waters wisely in this important time.
Probates, Wills, and Irrevocable Trusts
The reason that irrevocable trusts are such an important legal question is that they are almost always excluded from probate. This is an excellent feature because probate can be lengthy as well as expensive. The assets of an irrevocable trust are not considered to be part of the grantor's estate at the time of death so they bypass probate and are passed straight on to the beneficiaries.
That being said, problems could crop up if the grantor was holding assets outside of the trust that still have to be probated. Effective estate planning can avoid problems in the probate process and lead to a smooth, orderly transfer of all assets.
Trust Tax Consequences
The grantor's death also may trigger all sorts of tax issues for the trust and its beneficiaries. Although the goal with most irrevocable trusts is to reduce the estate tax impact, any income that an irrevocable trust yields can still be taxed. That could mean fewer payouts to the beneficiaries after the grantor dies.
Distributions from the trust to beneficiaries may carry tax obligations. Your trustee must outline how this affects your beneficiaries in a notice to them. It is important to know the tax implications this income or distribution will bring before you proceed.
To help, you could plan the timing of distributions to lessen the impact on tax liabilities. For example, beneficiaries may choose to defer the receipt of their distributions until it suits their situation better. This essentially allows them to "control" their own taxable income. They might defer their income into a year when it is not subject to such a high tax rate.
The trust is further subject to particular state and federal tax laws apart from income tax. This could also impact how assets should be disposed of or invested. Trustees must maintain proper adherence to these rules or there could be penalties like a tax hit that will lower the value of the trust for beneficiaries.
The Irrevocable Trust: After The Grantor Dies
There are a lot of reasons why an irrevocable trust benefits the grantor. You get incredible asset protection. You lay out a succession and distribution plan for your assets, and you have control over your tax liabilities while protecting yourself from creditors and lawsuits.
But after you’re gone, what happens to that irrevocable trust? That’s why it’s important to get it right from the start. And that’s why we’re here to help. If you’d like to discuss an irrevocable trust that works for you, let’s get started today.
Fill out the form below and we’ll be in touch to talk about your next options. We’ll even lay out a new style of trust that you can set it up from anywhere in the country, regardless of what state you live in. Fill out the form today and let;s get your financial future on track.
