An irrevocable trust is a legal tool that can help shelter funds from creditors. A wisely structured trust can help to better ensure an intended heir not only receives their inheritance but also gets an inheritance that is protected from attempts by creditors to claim ownership interest in the funds.
Although a grantor can draft this tool to meet a number of wishes, some common errors can negate the benefits of the irrevocable trust.
Two common issues to watch out for include:
- Trustee designation issues. It is not uncommon for a grantor to name the intended beneficiary as the trustee for the irrevocable trust. Although the grantor may feel this designation allows the intended beneficiary control over his or her inheritance, it can also remove the protections that are one of the primary benefits of this trust structure. If the grantor lists the intended beneficiary as the trustee, a creditor could have access to the funds. This means the funds could be subject to division if the beneficiary ever goes through a divorce.
- Mandatory income provision considerations. Grantors often include mandatory income provisions within a trust. The grantor may use this provision to instruct the trustee to provide income to the beneficiary to support the “health, education, maintenance and expenses” of the beneficiary. Some have challenged the presence of this provision to qualify the regular income payments from the trust as a marital asset. This is another argument that could open the funds up to potential creditors.
These are just two considerations to discuss with legal counsel before incorporating an irrevocable trust into your estate plan.