When you set up a trust, you can choose between two different types: revocable and irrevocable. Because your financial goals can evolve over the course of your life, a revocable trust might seem like the obvious choice. Why would anyone want an irrevocable trust that they can’t change later down the road?
Truth be told, there are plenty of benefits to irrevocable trusts that make them excellent instruments for high-net-worth individuals such as surgeons, business owners, and more.
What is an Irrevocable Trust?
An irrevocable trust is, true to its name, “irrevocable," meaning that it can't be changed after the fact. When you set up such a trust, you won't be able to change things like:
- The terms of the trust or its distributions (e.g., the distribution timeline)
- The trustee or who manages the trust
- What level of control you have over the trust
- And more
Think of an irrevocable trust as unchangeable. Once it is set up, it’s effectively written in stone. The trust will be executed and managed by the trustee according to your initial intentions.
How Does an Irrevocable Trust Work?
An irrevocable trust isn’t necessarily more complicated or mysterious than a standard revocable trust. You’re still the grantor or person who sets up the trust.
You still need a trustee to administrate and manage the trust, plus handle any distributions. You also need to name any beneficiaries, which can include yourself, your kids, etc.
An irrevocable trust must also be drafted and looked over/signed by a licensed attorney in its target jurisdiction. For example, if you want to set up an irrevocable trust in the Cook Islands, you need a local lawyer to set up the paperwork and make sure everything is airtight.
Having a team of financial advisors and legal experts on hand to look over the documents and ensure that there aren’t any loopholes to exploit is also a wise idea.
Revocable vs. Irrevocable Trusts
You might understand irrevocable trusts a little better if you compare them with revocable trusts.
With a revocable trust, if you want to change trustees, make changes to the trust or the beneficiary list, or adopt other alterations, you can do so (by following the right procedures). With an irrevocable trust, those options are permanently off the table.
Revocable trusts are certainly more flexible, but it also means they are more vulnerable to court orders or other attacks on your wealth. For example, if you have a revocable trust and a lot of valuable assets stored within, imagine being sued in civil court or becoming the target of creditors.
If any of those threats are successful, you could find yourself the target of a court order telling you to alter your trust and take the assets out for payments.
Why Might You Need an Irrevocable Trust?
The above use case is just one example of why you might need an irrevocable trust. But there are many deep, highly important reasons why irrevocable trusts could be perfect instruments.
Asset Protection
As noted above, irrevocable trusts are highly important for asset protection. If you set up an irrevocable trust, a court can’t tell you to make changes to the trust – it’s literally illegal!
Even better, if you set up an offshore irrevocable trust, a court in the US won’t have any legal jurisdiction over the trust in the first place. Therefore, such a vehicle will be almost impenetrable and the ideal legal vault for securing lots of liquid capital, real estate deeds, and more.
An irrevocable trust is the only trust you can rely on for asset protection purposes. With a revocable trust, you can change it by definition, so a court order could compel you to do just that. A court order can’t tell you to change an unchangeable irrevocable trust under any circumstances.
Estate Planning
However, irrevocable trusts can also be useful for estate planning purposes.
Say that you want to tuck away a lot of cash and property for your future descendants. However, you want to ensure that those future beneficiaries don’t have the ability to change the trust so that they get the money earlier than you intend (e.g., you want your grandkids to get a cash reward for finishing college, but you want to make sure they can’t change the terms of the trust to take that money earlier).
An irrevocable trust is just the ticket. This kind of trust vehicle won’t be changeable by you or your grandkids, so you can rest assured that it will be carried out according to your original intent.
Monetary Control for a Beneficiary
Similarly, an irrevocable trust could be a perfect tool to ensure monetary control for a beneficiary who can’t be trusted with it. Say you want to set up a trust for someone with a disability. An irrevocable trust could ensure they receive lifetime distributions without being able to change the trust to their detriment.
At the same time, you can set up a trust for someone with a disability who also qualifies for government benefits. Since irrevocable trusts can shelter assets and income, you can set up such a trust so the disabled beneficiary continues to qualify for government assistance and gets distributions simultaneously.
Guaranteeing the Way Funds Are Used
More broadly, an irrevocable trust could be a smart way to ensure that your funds are used in the way you always intended.
For example, imagine that you want to set up a trust to make charitable donations to an organization of your choosing. You want no one to be able to change that trust and its distribution schedule since the charitable organization matters a great deal to you.
With an irrevocable trust, you'll be able to guarantee that the charitable organization gets the trust distributions as planned originally, even if someone else, like a family member, wants the money inside instead or early.
As you can see from the above examples, irrevocable trusts have lots of use cases and benefits when leveraged smartly. Any “downsides” to irrevocable trusts can be circumvented with proper planning and foresight – things that Dominion can help with once you get in touch with one of our representatives and tell us your goals.
When you compare revocable and irrevocable trusts next to each other, it’s clear that irrevocable trusts are much better for long-term wealth planning and preservation. Revocable trusts, for all their flexibility, simply aren't durable enough to be worth it overall.
Can an Irrevocable Trust Be Changed?
Although irrevocable trusts are broadly unchangeable, they can be altered under limited circumstances.
For example, if you and any beneficiaries all agree that an irrevocable trust needs to be altered, you can all petition the court for such an alteration. A court may be able to order the modification of an irrevocable trust in criminal cases, as well.
In addition to court intervention, certain trust instruments may include provisions that allow for modification without court involvement. One such provision is the appointment of a trust protector, an independent party granted specific powers to amend the trust, such as:
- Changing trustees
- Modifying distribution terms
- Altering the governing law of the trust
This offers a degree of flexibility while still upholding the grantor’s original intent.
Another method is known as “decanting,” where the trustee transfers assets from one irrevocable trust into a new trust with modified terms. This process is often used to update outdated provisions, change the governing jurisdiction, or address unforeseen circumstances.
Nonjudicial settlement agreements can also be utilized to modify certain aspects of an irrevocable trust, provided all interested parties consent. This method is typically faster and less costly than court proceedings, making it a viable option for resolving disputes or adjusting administrative provisions.
However, if you set up your irrevocable trust in an offshore jurisdiction, the Cayman Islands, Jersey, Cyprus, or elsewhere, your trust will be truly unchangeable by US courts. That’s why we specialize in setting up offshore irrevocable asset protection trusts at Dominion.
How to Know Whether You Need an Irrevocable Trust
Still not sure whether this vehicle is right for you? Ask yourself these questions:
- Do you have a high net worth of $10 million or more?
- Are you a target, or are you likely to become a target, of creditors and frivolous lawsuit plaintiffs in the future?
- Do you want to ensure that your assets are safe from ex-spouses or family members who might misuse the wealth you've worked so hard to build up?
If the answer to any of those questions is “yes,” then an irrevocable is an important tool you can’t ignore. An irrevocable trust can protect your assets from all kinds of threats, ranging from lawsuits to creditors to divorce settlements and more.
On top of that, when your trust is set up with a reputable and experienced firm like Dominion, it can do more than just protect your money: it can also make you money with your existing assets.
Savvy investments will enable your assets to build upon their current wealth over decades, ensuring that your estate keeps pace with inflation and even turns a profit in the long run.
That's peace of mind and financial security that your money can and should buy. You've already worked very hard to become a high-net-worth entrepreneur or professional. It's time to use that money to protect your estate and your future. Dominion can make that happen.
Speak with a Dominion Representative Today
In the end, an irrevocable trust is the only instrument you can rely on to protect your wealth and keep your estate safe from all kinds of legal hazards. That’s why you should get in touch with one of our representatives today.
At Dominion, our legal and financial specialists can set you up with the right irrevocable in the ideal jurisdiction for your needs. Contact us today, and we'll get started formulating a comprehensive asset protection strategy with a consultation.
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