While an irrevocable trust is inflexible by nature, there are several benefits to giving up control of assets. People typically form irrevocable trusts is to avoid estate taxes on the property in the trust and eliminate income generated by trust assets from the settlor's income for tax purposes. Liability protection is another advantage because the settlor's assets are protected from creditors and judgments against him, as he no longer owns the property. Finally, because the trust assets do not have to go through probate, they can be distributed to the beneficiaries more expediently.
A common irrevocable trust is the irrevocable life insurance trust, which is designed to protect the proceeds of a life insurance policy from creditor claims and estate taxation. A split interest trust is an irrevocable trust designed to provide income to one set of beneficiaries for a period of time and provide income to a different set of beneficiaries at a later time. One type of split interest trust is a charitable remainder trust. This trust pays the settler, or a family member in some cases, an annual income for a period of years with the remaining property designated for a charitable beneficiary. Another split interest trust called a grantor retained income trust, or GRIT, reduces gift taxes on the transfer of assets to the next generation. With a GRIT, the settlor keeps an income interest in transferred assets for a number of years, and then the assets are distributed to the remainder beneficiaries. With a qualified personal residence trust, the settler transfers his personal residence to the trust, but retains exclusive use of the residence for a period of years.
Despite the irrevocable language, trusts can be drafted with provisions that permit change through devices such as a trust protector. A trust protector is a disinterested fiduciary, such as an accountant or attorney, who has limited oversight powers. The scope of the powers retained by the settlor can also allow adaptive changes. Further, California law allows modification in a number of circumstances, usually with court approval. An irrevocable trust can be modified under certain circumstances if all beneficiaries agree by petitioning the probate court. A trust can be amended if all the beneficiaries, or at least one beneficiary and the settler, consent. The trust can be amended if the principle is too low to support administration or to conform to changing tax laws. The court will allow changes under certain other circumstances such as when a beneficiary charity changes its structure.
The trustee of an irrevocable trust is the person, persons or institution named by the settlor to manage the trust. If the goal of the trust is to remove assets from the settlor’s estate, he cannot be involved in decisions on distributions; he must choose someone to manage the trust assets according to his directions as set out in the trust document. Some people name a family member or trusted friend as trustee, while others hire a lawyer or accountant to fill this role. California courts generally hold trustees to a very high standard. Trustees are expected to be prudent, loyal and impartial. They must protect trust property, report to beneficiaries, diversify investments, keep records and defend the trust against any claims. Some trusts provide a method for removing a trustee, while others state that only a court order can remove a trustee.