How to Set Up an Irrevocable Trust

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An irrevocable trust is a trust that cannot be revoked during the lifetime of the person who creates the trust, commonly referred to as the "settlor" or the "grantor." This means that, once the settler's property is transferred to the trust, it cannot be transferred back to the settlor. Irrevocable trusts are most often used to protect assets from creditors or to obtain certain tax advantages. While it is advisable to enlist the help of an attorney when setting up this type of trust, it is possible to do it yourself.

Quick Guide: Creating an Irrevocable Trust

  1. Work with a qualified attorney with experience setting up irrevocable trusts.
  2. Decide on a trustee (the person who manages the trust).
  3. Choose your beneficiaries (the people who receive your assets).
  4. Draft the trust agreement based on a model trust form.
  5. Sign and date the agreement.
  6. Have the trustee apply for a tax ID number.
  7. Place your assets into the trust.
Part 1
Part 1 of 4:

Finding An Attorney

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  1. When a trust is created, you will be placing certain pieces of property in the hands of a trustee, which is a person who holds the property for the benefit of beneficiaries. Once an irrevocable trust is created and executed, you will not be able to change the terms of the trust or cancel the trust altogether. Also, if a trust is executed properly, you will minimize your possible tax responsibility and protect assets from creditors.
    • Therefore, because of the consequences that flow from the creation of an irrevocable trust, enlisting the help of a qualified attorney will be helpful. For example, if an irrevocable trust is created without the help of an attorney and one of the provisions is not exactly how you want it, you may not be able to fix it. You should strive to get it right the first time so you do not have problems in the future. [1]
  2. To find an attorney who specializes in trusts and estates, you should start by asking people you know. oftentimes, the people you know will have set up trusts themselves or know people that have done so.
    • If you have hired an attorney in the past, even one in a different discipline, ask that attorney for a referral.
    • Ask your parents who helped them set up their estate.
    • Discuss attorney options with friends you trust. If they know any attorneys, ask them questions about their experience with the attorney they are recommending. Was the attorney attentive and respectful? Did the attorney complete the task diligently and ethically?
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  3. If your friends and family cannot offer you much help, contact your state bar association. In California, for example, the state bar website offers three types of services to help you find a qualified attorney.
    • First, you have the option of typing in a lawyer's name or bar number. This is a great resource if you have already gotten referrals and you want to check their background, expertise, and history of discipline.
    • Second, you can contact California's Legal Services programs, which help low income, seniors, and persons with disabilities find an attorney.
    • Third, you can use California's Certified Lawyer Referral Service, which provides step-by-step assistance in finding an attorney to help you. [2]
  4. Lawyers specializing in trusts and estates will often be a part of specialization groups that provide services to help you find one of their attorneys. If you use these resources you ill have a great chance to find someone who not only specializes in trusts and estates but also someone who is well respected in the field.
    • For example, one such organization is the American College of Trust and Estate Counsel. If you go to their website, their homepage offers a link to help you find one of their attorneys. It will allow you to search by state and it will provide you with the name and contact information of all of their members. [3]
  5. The internet can be a great resource for gathering information about attorneys that you have found. There are a number of websites you can use to review an attorney's background, experience, discipline history, and client feedback. Some of these sites include Avvo.com, FindLaw, LawHelp.org, and Lawyers.com. Visit these sites, type in the name of an attorney you are interested in, and see what has been said about them.
    • However, be aware that client feedback can be positive or negative for any number of reasons and it may not reflect the true nature of the attorney's abilities. For example, a positive review may come from a longtime friend who is simply trying to put in a good word for their buddy. On the other hand, a negative review could be from a client who lost a case even though the attorney performed well.
  6. Once you have narrowed down your list of possible candidates to about three, you should take part in an initial consultation with each of them. During your initial consultation, you will be asked to briefly outline why you want to hire an attorney. In addition, you will have the opportunity to ask as many questions as you want.
    • Some of the questions you may want to ask include:
      • How many irrevocable trusts they have written;
      • How many of their trusts have been challenged in court;
      • If they have had any discipline as an attorney; and
      • How their fee arrangement works.
  7. After the consultations, choose the attorney that you feel most comfortable with. The attorney you choose should offer a fair fee arrangement, be trustworthy, not have a history of discipline, and should know the legal issues surrounding your reason for hiring them.
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Part 2
Part 2 of 4:

Deciding If an Irrevocable Trust is Right for You

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  1. Before you decide which type of trust you will be setting up, it is helpful to understand the difference between these two type of trusts, which centers on how much control you wish to have over your assets. [4]
    • If you set up a revocable trust, you can rewrite and change the terms of the trust as much as you would like during the lifetime of the trust.
    • Once you set up an irrevocable trust, however, you place all control over the trust into the hands of the trustee (the person you designate to manage your trust), and you will need the consent of everyone involved to change the terms of the trust.
    • An irrevocable trust involves three parties (you, the person managing the trust, and the people who will ultimately receive the assets placed into the trust). You will be permanently transferring control of any assets placed into the trust to the person managing the trust—referred to as the trustee.
  2. One reason you may wish to set up an irrevocable trust is to make sure that a disabled loved one is properly cared for. Because the terms of an irrevocable trust are not easily changed, you can rest assured that this person will be provided for using the assets in the trust.
    • In addition, you can word the trust in such a way that the trustee will be able to use the funds to provide for the disabled beneficiary without limiting that person's ability to apply for need-based government benefits because he or she doesn't actually own the property placed into the trust. [5]
  3. Another common reason to establish an irrevocable trust is to shield your assets from potential professional or creditor liability. [6] Creditors cannot legally access the money you place into an irrevocable trust. [7]
    • Note, however, that if you set up an irrevocable trust to protect your assets from creditors while you have legal or credit problems pending, you may be liable for fraud. [8]
  4. Still another reason to set up this kind of a trust is to safeguard the inheritance your children will receive. If your children lack financial savvy, setting up a managed irrevocable trust is a way to provide for them in a more controlled way than simply giving them a lump-sum gift. [9]
    • This type of trust can also ensure your children will receive their rightful inheritance in the case of a hotly contested divorce.
  5. An irrevocable trust can also provide a certain amount of tax sheltering for assets that appreciate in value over time. For example, if you were to simply give away a piece of real estate, the asset's value for tax purposes would be the same as if you still possessed it. However, if you gift the same property using an irrevocable trust, when it is inherited the taxable value will be adjusted to reflect its appreciated value, resulting in far less tax liability for the person who receives it.
    • You can also set up the trust so that all income generated by the trust is tax-deferred until the beneficiaries actually receive it.
    • Because you will be transferring property out of your control, you will also receive tax benefits because you will no longer have to pay taxes on property placed into the trust (as it is no longer legally yours).
  6. Due to the fact that the terms of an irrevocable trust cannot be easily modified, placing assets into a trust with a particular set of individuals or charities named as beneficiaries can ensure that your money goes where you want it to after you pass away.
    • While you won't be able to directly control the assets after they are placed into the trust, you control how and to who they will be disbursed when you create the trust document, and you can rest assured that your assets will be distributed according to your intentions.
  7. When a person passes away, his or her possessions become property of his or her estate. Before these assets can be distributed according to the terms of the decedent's will, the will must go through a process called probate, which refers to the legal proceeding required to prove the will and its terms are legal and genuine. Setting up an irrevocable trust allows any assets you place into it to avoid the probate process when you pass away.
    • This also has privacy benefits, as courts (and, with them, the public record), will not be able to touch or see the trust property upon the death of the grantor.
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Part 3
Part 3 of 4:

Preparing to Set Up an Irrevocable Trust

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  1. You can place almost anything of value to which you hold legal title into an irrevocable trust. This includes property (real estate), insurance policies, family heirlooms, businesses, cash, stocks, bonds, art, or vehicles.
    • There is no limit as to the value of the property you can place in an irrevocable trust. [10]
  2. The trustee you name in your trust document will be the person responsible for managing your trust. Because the trustee will be the person with sole control over how the assets placed into the trust will be managed and disbursed, and how the terms of the trust will be executed, it is of vital importance that you are confident that this person is dependable, honest, and qualified to both make financial decisions and execute the trust in the way you intend. [11]
    • Consider naming a successor trustee who will manage the trust in the event the original trustee can no longer act as the trustee for whatever reason.
    • Consider appointing a trusted family member as your trustee to save on the costs of an independent trustee.
    • You can designate co-trustees if you are not comfortable with one person managing all of your trust assets. [12]
  3. You also must determine who will be the beneficiaries of your trust (i.e., who will receive the assets placed into the trust). You are not limited to naming relatives as beneficiaries of the trust—they can be anyone, including friends, employees, charitable organizations, public institutions, etc.
    • Consider naming successor beneficiaries who will receive the trust assets if the original beneficiaries pass away. If the trust has no beneficiaries, the property goes back to your estate. [13]
    • You do not have to specifically name all beneficiaries. If you wish to leave a part of the trust assets to future children or grandchildren, you may name “my current and future children” or “my children, and any other children I may have in the future” as a beneficiary.
  4. You will also provide in the trust document the terms under which the trustee will distribute trust property to your designated beneficiaries, and when these distributions will be made. For example, you may wish that some of the trust property will remain in the trust for a period of time such that future generations can benefit from it, instead of having the assets distributed on a more short-term basis.
  5. After you set up an irrevocable trust, you will no longer have access to or control of the assets you place in the trust. However, you can still retain income generated by those assets (such as rent on a piece of real estate) if you wish by placing a provision to this effect in the trust document. This will help you retain at least some control over the assets you will be giving away in the trust.
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Part 4
Part 4 of 4:

Setting Up an Irrevocable Trust

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  1. Any trust you create should be completely spelled out in a written document. The best way to begin this process is to obtain an example of the type of language commonly used to create irrevocable trusts. Reading and understanding a model trust form will help you when it comes time to draft your own trust document. Try looking for a model trust form in the following ways:
    • Ask people you know that have set up irrevocable trusts to see a copy.
    • Ask a local attorney for a model form.
    • Purchase a form from an online legal-document seller.
    • Search the internet for sample trust forms. [14]
  2. Using a model form, draft a trust agreement according to the decisions you made above. Spell out which assets will be placed into the trust, name a trustee and beneficiaries, and outline the terms by which the trust assets will be distributed (how, when, to whom, etc.). Your trust agreement should also provide for what happens to the trust and its assets in certain situations, like the death or incapacity of the trustee, or the death of one or all of the beneficiaries.
    • Don't just obtain a model form and fill in the blanks without reading the form thoroughly. Because you will be surrendering control over your assets, you want to make sure the trust agreement does exactly what you want it to do and nothing more. Read and re-read the document after you are finished to make sure it unambiguously achieves its intended aim.
    • This document, as written, will solely control how the trust is managed and its assets are distributed. It is incredibly important that it be drafted well. Strongly consider hiring an attorney with relevant experience to help with this process, especially if the assets placed into the trust are of high value.
  3. After you are satisfied with your written trust agreement, you must execute it, which will give the irrevocable trust give the full force of law as a separate legal entity. You will have to sign and date the document and, depending on your jurisdiction, you may be required to have witnesses present for the signing or to have the document stamped by an official notary.
    • Be sure to keep a copy of the original written trust agreement in a safe place for your records.
    • Give a copy of the written trust agreement to the trustee and beneficiaries (and their named successors, if any).
  4. Because the trust is its own, separate legal entity, you must apply for a unique tax number to assign to the trust itself for tax purposes. [15] This number is known as a federal employer identification number, and you must apply to the IRS to get one.
    • You can apply for this number: (1) online [16] ; (2) by contacting the IRS at (800) 829-4933; or (3) by completing and mailing in Form SS-4 [17] to the address listed on the form. [18]
  5. Once you have drafted and executed the trust agreement, it is time to actually place the designated assets into the trust. The process differs slightly depending on the type of asset to be placed into the trust. [19]
    • For cash or securities, the trustee will open a bank account in the name of the trust, and you will instruct your bank to transfer the funds to that account. The trustee will use the federal employer tax identification number to create an account for the trust.
    • For real estate, you will transfer the property to the trust using a deed.
    • For insurance policies, you will need to complete the relevant forms from your insurance company.
  6. Depending on your jurisdiction, you may have to register your trust with the state in which you live. For example, in Colorado you must register your trust with the district court of the county in which the trust will be administered and pay a filing fee. Try consulting with a local tax or estate-planning attorney to determine if your jurisdiction has any such requirements.
  7. If your trust will generate more than $600 of taxable income on an annual basis, the trustee will have to complete and file Form 1041 [20] with the IRS, which is the form for U.S. Income Tax Return for Estates and Trusts. [21]
    • The trustee will use the expected annual income tax liability of the trust when completing this form for the first time.
    • If the beneficiaries will be paying tax on income generated by the trust, rather than the trust itself paying the tax, each beneficiary will need to complete and file a Schedule K-1 form [22] with the IRS. [23]
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      Tips

      • You can sell assets to your trust at fair market value. [24]
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      • To save money, consider drafting the trust document yourself, and then have an attorney simply look over the document instead of writing it from scratch. The attorney can spend a short amount of time reviewing what you have written and provide any necessary guidance.
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      Warnings

      • This article, while informative, does not represent legal advice. You should always consult with an attorney with relevant experience before entering into legally binding arrangements.
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      • You should never sign anything that may affect your legal rights or obligations without consulting with a licensed attorney.
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      • Before titling property to an irrevocable trust, you should consult with an experienced estate or tax attorney.
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      References

      1. ↑ https://www.helsell.com/faq/irrevocable-trusts/
      2. ↑ https://members.calbar.ca.gov/fal/MemberSearch/FindLegalHelp
      3. ↑ https://www.actec.org/
      4. ↑ https://money.usnews.com/financial-advisors/articles/choosing-between-a-revocable-and-irrevocable-trust-for-your-client
      5. ↑ https://www.nolo.com/legal-encyclopedia/irrevocable-living-trusts.html
      6. ↑ https://money.usnews.com/financial-advisors/articles/choosing-between-a-revocable-and-irrevocable-trust-for-your-client
      7. ↑ https://thelawdictionary.org/article/how-to-file-an-irrevocable-trust-with-the-irs/
      8. ↑ https://money.usnews.com/financial-advisors/articles/choosing-between-a-revocable-and-irrevocable-trust-for-your-client
      9. ↑ https://www.nolo.com/legal-encyclopedia/irrevocable-living-trusts.html
      1. ↑ https://www.helsell.com/faq/irrevocable-trusts/
      2. ↑ https://www.cnbc.com/2014/05/27/heir-tight-the-dos-and-donts-of-creating-rock-solid-trusts.html
      3. ↑ https://www.helsell.com/faq/irrevocable-trusts/
      4. ↑ https://www.legalzoom.com/articles/what-is-an-irrevocable-trust
      5. ↑ https://freelegalforms.uslegal.com/living-trust/irrevocable/
      6. ↑ https://thelawdictionary.org/article/how-to-file-an-irrevocable-trust-with-the-irs/
      7. ↑ https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online
      8. ↑ https://www.irs.gov/pub/irs-pdf/fss4.pdf
      9. ↑ https://www.irs.gov/charities-non-profits/obtaining-an-employer-identification-number-for-an-exempt-organization
      10. ↑ https://www.helsell.com/faq/irrevocable-trusts/
      11. ↑ https://www.irs.gov/pub/irs-pdf/f1041.pdf
      12. ↑ https://thelawdictionary.org/article/how-to-file-an-irrevocable-trust-with-the-irs/
      13. ↑ https://www.irs.gov/pub/irs-access/f1041sk1_accessible.pdf
      14. ↑ https://turbotax.intuit.com/tax-tools/tax-tips/Small-Business-Taxes/What-is-a-Schedule-K-1-Tax-Form-/INF19204.html
      15. ↑ https://www.helsell.com/faq/irrevocable-trusts/

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