Irrevocable Inter Vivos Trusts
The settlor who wishes to avoid the pitfalls inherent in a revocable inter vivos trust should create an irrevocable inter vivos trust. An irrevocable trust denies a settlor all but indirect control over assets settled on the trust from the moment the trust is created. For this reason, as a scheme for protections against creditor attack or attachment, the irrevocable trust is virtually perfect. The settlor no longer holds the title to the property once it’s settled on the trust, and neither does he or she have any way to reacquire the settled property.
Because the assets are removed from the settlor and are vested in the trust, the only successful creditor assault might come if the asset transfer is later proven to be a fraudulent conveyance, and therefore deemed invalid. Irrevocability acts as the trust’s armour. Courts respect irrevocability, and when it’s present they usually rule trust assets are shielded from the settlor’s creditors.
The guiding rule is that the less control you as the settlor retain over the trust assets, the greater the chance a court will believe it was your honest intention to place those assets in trust for the named beneficiaries, not simply to avoid possible creditor attachment.
As settlor of an irrevocable trust, you shouldn’t serve as its trustee. It’s far better to select an autonomous third party in the form of a professional trustee for administration and management. For the trust to be impenetrable, the trustee must be totally independent in exercising its power. The trust’s terms should also forbid distribution of income or capital to the settlor as a beneficiary.
This isn’t to say a settlor should never be a trustee of an irrevocable inter vivos trust. A settlor may serve as a trustee and accomplish an effective transfer as long as he or she doesn’t retain any direct or indirect economic interest in the trust assets or any discretionary powers over the distributions out of the trust. The usual way to accomplish this is to name two additional independent co-trustees who exercise sole independent discretionary powers over such distributions, while also prescribing a majority rule governing policy.
Irrevocable trusts have other advantages in addition to asset protection. Irrevocability is attractive for reasons such as protecting family heirlooms, creating a legacy for your heirs, and general tax advantages. A trust should be a logical part of your estate plan, creating reasonable provisions for your spouse, children and other loved ones, either during your lifetime or after you pass away.
Invitation for Discussion:
If you would like to discuss this article in greater detail, or any other business law matter, please do not hesitate to contact one of the lawyers in the Tax group at Shea Nerland LLP.
Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.