What is an Irrevocable Trust?
Laura Kuntz CPA/PFS, MBT explains the difference between irrevocable trusts and revocable trusts. She answers questions including: Why would people choose one or the other? What are the advantages of an irrevocable trust? Why is it important to handle them properly, including expenses and investments?
An irrevocable trust is a trust that, generally, in not changed after it's been constructed. That compares to a revocable trust, that can be freely changed after it's constructed. And many people have a revocable living trust. It's a very common estate planning tool, but many of our clients also have some type of irrevocable trust, either a family trust, or a generation skipping trust, or a QTIP trust, or a trust that wraps around an inheritance from a parent.
These trusts have many advantages. They may help reduce estate taxes, they help protect in the event of divorce -- so many advantages That's why they're put in place. But handling them properly is so important, and I think that's often missed when an individual is the trustee of their own trust, or there's a family member who's a trustee. It is so important that the expenses that belong to the trust get paid out of the trust and not paid personally and vice versa to help protect that trust from estate tax, and it's also important that the investments be properly handled so that in the end there isn't some kind of legal battle about what's left and perhaps the feeling was that the investments weren't properly handled and so forth.
So if you happen to have a family trust, a QTIP trust, a generation skipping trust, any of these types of irrevocable trusts, make sure that you're working with a financial advisor, and of course, an attorney as needed, and a CPA, of course, who really help you administer these in a way such that the protections that you sought or your parents sought in putting these together are actually achieved.