Irrevocable trusts have been common estate planning tools in recent years. Once thought to be only for the super rich, they have become fairly common place. In most instances, they are a great way to insure your assets remain useful long after you die. There are dozens of reasons for creating irrevocable trusts but little guidance in how to unwind one.
The term “irrevocable trust” suggests that the trust is more or less permanent. That is not always the case, however.
To understand why someone would want to revoke an irrevocable trust, some very basic understanding is first necessary. An irrevocable trust has three parties. The person putting property or money into the trust is called the “settlor.” He or she is the person who creates the trust.
The beneficiaries are the people who will receive the property. In most irrevocable trusts the beneficiary is a spouse, child, grandchild or other family relation.
Finally, there is the trustee. That is the person or entity (often a bank) who manages the trust.
Some people create irrevocable trusts in order to receive a tax benefit or for Medicaid planning purposes. Others to protect their legacy from creditors or insure that a child’s inheritance will be protected from creditors or divorce. By making the trust irrevocable, the property is protected from claims of third parties. Changing tax laws and economic realities sometimes make people want to cancel or revoke their irrevocable trust, however.
Can it be done? Yes.
Unwinding a trust is tricky and varies state by state. There is also a risk that the IRS could disallow the process if not performed properly.
The most common ways of getting around an irrevocable trust involve having the beneficiaries and trustee consent to dissolution. That is often not difficult if all the parties are family members.
Some states allow an irrevocable trust to be undone if the trust is small or too difficult to maintain. Other trusts may have provisions which allow a direct distribution of property to a widow.
As noted above, trying to unwind one without professional help is risky. In recent years, many folks have created their own trust using LegalZoom and similar services. That’s fine but unwinding a trust is never as easy as its creation.
Another consideration is state inheritance and estate taxes. 21 states and the District of Columbia have such taxes (including Maine and Minnesota where we have offices). Even if unwinding an irrevocable trust makes sense under the IRS code and is otherwise possible, make sure to also examine any potential state tax impacts.
If you have an irrevocable trust and are now feeling some buyer’s remorse, give us a call. Our tax lawyers can help you decide what moves make the best economic sense for you. The U.S. Tax Code and the tax laws of the states are not static. As laws change you should insure that your estate plan still makes economic sense and provides the control and security you need.
For more information, contact attorney Bethany Kroes at or by telephone at (414) 223-0464. All inquiries are protected by the attorney – client privilege and kept in strict confidence.
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and San Francisco, California. IRS tax services available worldwide.
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