Trusts can be helpful tools for estate planning and tax management. It’s important to know the difference between the types of trust if you intend to use them for these goals. For example, an irrevocable trust can’t be changed or terminated unless the beneficiary agrees to the modifications. That is a significant difference from a revocable trust.
One reason that a trust grantor can’t change the trust terms is that with the transfer of assets into an irrevocable trust, the grantor passes ownership to the trust, which also means the trust is liable for taxes, not the grantor. In contrast, if the grantor establishes a revocable trust, the assets remain legally owned by the grantor, who also is responsible for the taxes. That structure allows the grantor to make changes to the trust, its contents, and the beneficiaries.
What does the trustee do?
The trustee manages the assets that have been transferred into the trust. Remember, with an irrevocable trust, the grantor has made a permanent transfer of those assets. It isn’t unusual for the trust creator to name a beneficiary as the trustee—for example, the trustee could be a spouse or child. If the trustee is one of several beneficiaries, it’s possible that they may have a conflict in the completion of their responsibilities, which include:
- Investing the assets
- Protecting the assets from claims
- Managing the bills and tax obligations
- Maintaining records
- Distributing income from the trust to the beneficiaries
A trustor should exercise caution in choosing a beneficiary as trustee. In addition to avoiding conflicts of interest, the trustee should be knowledgeable about the assets and the trustor’s intentions.
What is the role of a non-trustee beneficiary?
The trust beneficiary receives any distributions from the trust, as stipulated by the trustor. A beneficiary can be a person or a charitable organization. A trust may have many beneficiaries, or just one. A trust may contain real estate, business interests, stocks, bonds, cash, and other investments. It may be set up to distribute income regularly or at specified intervals. Some trusts must distribute all income, while others may retain some.
Can a trustee be removed?
As mentioned, one advantage of an irrevocable trust is that the assets contributed to it are no longer the responsibility of the grantor. The corresponding disadvantage is that the grantor no longer has the control they previously had over the assets. It can be challenging to remove a trustee who does not want to step aside. Many irrevocable trusts have procedures for doing so when there is cause, but it’s possible that the other beneficiaries would need to ask a court to intervene if they believed a change was in the best interest of the trust.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
