In an irrevocable family trust, the grantor, or the person giving assets to the trust, relinquishes ownership of the property to the irrevocable trust, which serves as its own entity. As implied by its name, an irrevocable trust may not be terminated or modified by the grantor. With the express written consent of the beneficiary, however, the grantor and trustee may make material changes to the agreement.
Because the laws governing irrevocable family trusts vary by state, trusts are generally drafted by an attorney and then executed by the grantor. The beneficiary, or future recipient of the funds, may also need to execute the irrevocable living trust. The grantor is responsible for establishing the criteria for how the beneficiary will receive the proceeds from the trust.
Irrevocable family trusts allow the grantor to establish set rules for when the beneficiary may begin to collect from the trust. Grantors often set up irrevocable family trusts to provide for a child or grandchild's education or to provide family members a set monthly income after the reach a certain age. These provisions must be outlined in the initial agreement for them to be legally binding.
The irrevocable trust is its own taxable entity, and tax returns are filed under the trust's EIN. Generally, the attorney drafting the trust will help the grantor establish an EIN with the IRS. The trust must file its yearly tax return using IRS Form 1041. Once the funds are distributed to the beneficiary, the beneficiary may assume the tax burden rather than the trust. Because the grantor no longer has control over the assets of the trust, he or she is not responsible for the taxes it accrues yearly. Likewise, creditors may not seek the funds gifted to an irrevocable trust after they are transferred by the grantor.
A trust is generally used to will property, assets, and money to a beneficiary after the grantor is deceased. Establishing an irrevocable trust and gifting assets to it allows the grantor to avoid some tax penalties. It also ensures that the trust's beneficiaries do not have to go through probate hearings after the grantor is deceased.
The irrevocable trust generally must have a trustee other than the grantor or beneficiary to manage the trust's funds. Generally, the grantor is responsible for selecting a trustee. Attorneys, banks and private money management companies often serve as the trust's manager and handle accounting matters, investments, property management and, after the death of the grantor, distribution of funds.