Despite its name, an irrevocable trust can be changed or terminated by a court in certain circumstances. Exactly when and how an irrevocable trust can be modified or terminated will vary by state; however, in most states there are circumstances under which even an irrevocable trust can be modified or terminated.
As the name implies, an irrevocable trust is one that, for the most part, cannot be revoked or modified by the maker of the trust. If you create an irrevocable trust, all assets transferred into the trust become trust property. Unlike a revocable trust, you will not be able to remove the assets or modify the assets once they become trust property. The trust becomes a holding place for the assets until the specified date of distribution to the beneficiaries.
This can create a problem if a maker does not think ahead. The assets in an irrevocable trust are no longer part of your taxable estate — a significant estate planning benefit; however, you cannot sell the assets or use them as security for a loan once they have been transferred into an irrevocable trust. For example, if you encounter financial difficulties and would like to sell some property that you have transferred in the irrevocable trust, you wouldn’t be able to do so.
A court may be able to modify or terminate an irrevocable trust with the permission of everyone involved. That means that you can’t modify it yourself, but if you have the agreement of all the trust beneficiaries, the court may allow the change. Keep in mind though, if the court is terminating the trust, the assets stored in the trust may have to be distributed to the beneficiaries. As such, if you are the maker of the trust the trust assets are still inaccessible to you.
If the trust has a spendthrift provision, though, terminating it could be much tougher. Spendthrift provisions offer protection for the assets, preventing creditors and other entities from taking the assets away from the beneficiaries. Some states do not allow those trusts to be terminated or modified under any conditions.
If you plan to include a trust in your estate plan be sure to consult with your estate planning attorney before deciding to create an irrevocable trust. While there are a number of important benefits to creating an irrevocable trust, it is important to consider assets placed in an irrevocable trust to be gone forever. Do not count on the possibility of a court changing or terminating the trust down the road as there is no guarantee that a court will do so even if everything involved is in agreement.
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