Changes cannot be made to an irrevocable trust except under very limited circumstances, and beneficiaries cannot be changed.
An irrevocable trust is an agreement between the grantor — the creator of a trust — and the trustee, the person or entity given control over property in a trust, who serves in a fiduciary capacity.
An irrevocable trust determines beneficiaries, and once assets are transferred to the trust they cannot be removed from the trust by the grantor. Changes cannot be made to an irrevocable trust except under very limited circumstances, and beneficiaries cannot be changed. Essentially, once an irrevocable trust is created and property transferred, the trust terms govern how the assets are to be used and the grantor loses control of property.
In most cases, assets owned by an irrevocable trust are protected from the creditors of the trust’s beneficiaries. Florida’s Trust Code (Florida Statutes Chapter 736) states that a trust beneficiary’s creditor cannot compel a distribution from a trust that is subject to a trustee’s discretion. This means that if a trustee has discretion of when and how much funds to distribute to a beneficiary of a trust, then the creditor cannot reach the trust funds. If a beneficiary is also serving as the trustee, then the trustee’s discretion must be limited by an ascertainable standard in order to limit a creditor from reaching the trust’s assets or compelling distributions.
An irrevocable trust is a separate taxpayer and the trustee must obtain an Employer Identification Number from the Internal Revenue Service. The two most important tax forms for irrevocable trusts are the Form 1041, which is similar to the Form 1040, and the K-1.
On the Form 1041, the trust deducts from its own taxable income any interest that it distributes to the trust beneficiaries. The trustee files the Form 1041 each year in which an irrevocable trust generates sufficient income. The trust also issues a K-1 to each beneficiary and the K-1 shows how much of the money being distributed from the trust was interest versus principal.
The K-1 is the tax form that lets the trust beneficiary know their own income tax liability from trust distributions received from the trust each year. It is important for trustees of irrevocable trusts to have a qualified accountant assist with annual irrevocable trust filing requirements.
Irrevocable trusts are governed by both the terms in the actual trust document and the Florida Trust Code. It’s important that a trustee understands the trust’s requirements imposed on him before he accepts the role of trustee. A trustee should seek the counsel of a qualified estate planning and trust administration lawyer should there be concerns on how to administer a trust or if issues with a beneficiary arise. Failure to properly administer a trust can result in liability to the trustee.
Irrevocable trusts can be created for not only estate planning, but also asset protection. You can create irrevocable trusts to remove assets from an estate to help reduce federal estate taxes. Irrevocable trusts can be used to protect a disabled person from losing or being disqualified from governmental benefits. This type of irrevocable trust is commonly referred to as a special needs trust. Other irrevocable trusts can be created for charitable giving. Further, revocable trusts will become irrevocable upon the grantor’s death.
This article originally appeared on The Ledger.
