Requirements for an Irrevocable Family Trust Agreement

By Cindy DeRuyter, J.D.

Requirements for an Irrevocable Family Trust Agreement

By Cindy DeRuyter, J.D.

Irrevocable family trusts can be an effective way for families to leave a legacy for future generations while minimizing estate taxes and protecting assets from creditors. In order to create an irrevocable family trust agreement, the person or people creating the trust (the grantors or settlors) must enter into a written, legal agreement with the person or organization that will manage trust assets (the trustee). While specific requirements vary from state to state, one constant is that the grantors must give up all rights to and control over assets placed in an irrevocable trust.

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Identifying One or More Trustees

Any type of trust agreement must identify the trustee. This is the person or professional fiduciary responsible for administering and distributing assets as specified in the agreement. The trustee is also responsible for making tax filings and providing required notices to the beneficiaries. The trustee can be an individual, but it could also be a corporate trust department or other professional.

The grantor can also name different levels of succession for the trustee role. So, if the first person or company named becomes unable to continue serving or resigns, the successor trustee could step in to act. The trust agreement should also clearly define the trustee's powers and responsibilities.

Identifying the Beneficiaries

In addition to the grantors and the trustee, there is a third role identified in an irrevocable trust agreement: the trust's beneficiaries (whether one or more). Beneficiaries are the family members who will inherit or have the right to receive trust assets under the terms of the irrevocable family trust agreement.

The trust agreement should clearly identify who the trust's primary beneficiaries are and under what circumstances they can receive assets from the trust. The agreement may also identify one or more contingent beneficiaries to receive trust assets if a first-named beneficiary dies during the term of the trust or upon the occurrence of a stated event or date.

Specific Statement of Irrevocability

To take advantage of the protections offered by irrevocable trusts, the trust agreement must specifically state that it is irrevocable. This means that a grantor cannot later unilaterally change her mind about the beneficiaries' or her own rights to receive assets under the trust or about any other material provision of the agreement.

While the grantor cannot change the agreement, it can make sense to specify that the trustee could amend the agreement under certain limited circumstances, such as to comply with changes in the law.

Transferring Assets to an Irrevocable Trust

To be effective, trusts must be "funded" by transferring assets into the name of the trust. Irrevocable trusts can hold many different types of assets, including life insurance, real estate, bank accounts, investments, and more.

The trust agreement should identify the assets that constitute the trust property, either within the agreement itself or on an attached schedule or addendum. When a grantor transfers assets to an irrevocable trust, she relinquishes all future rights to access, use, or control those assets. Because of this, trust funding decisions should be made deliberately and only after careful consideration.

If you are considering options for how to reduce estate taxes and protect your family's assets upon death, consider drafting an irrevocable family trust agreement. If you follow the above requirements, you can set up an agreement in a short period of time.

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