Setting up an irrevocable trust is a major milestone of your overall asset protection plan. After all, an irrevocable by its very nature can’t be changed after the fact, so you need to be sure your trust is drafted according to your exact needs and wishes before signing on any dotted lines.
But what if you change your mind afterward, or what if an emergency happens and you need to transfer assets out of your irrevocable trust? Is that even possible? Somewhat, but the truth is, as you might expect, quite complicated. Let’s take a closer look.
Irrevocable Trusts in a Nutshell
An irrevocable trust is an unchangeable trust, plain and simple. When you set up such a trust, you won’t be able to modify its terms, like who’s on the beneficiary list or who the trustee is, after the fact.
This has obvious advantages for asset protection purposes. The goal of an asset protection trust (which is practically always irrevocable) is to remove your ownership of key assets, like liquid capital or real estate, so you can’t be compelled to give those assets up in the event of a negative legal action.
A court might come to you demanding that you turn over ownership of a real estate property. If it’s in an asset protection trust, you won’t be able to do so since you don’t own the property anymore.
Even better, since the trust is irrevocable, the court also can’t tell you to change the terms of the trust to make a distribution, to name a court case plaintiff as one of the beneficiaries, or anything else.
Irrevocable trusts are also sometimes used for family and estate planning purposes. For instance, a wealthy grantor might want to pass on a certain amount of money to each of their grandchildren.
To make sure the grandkids don’t dip into the money pool too early, they make an irrevocable trust that the grandkids can’t alter.
Is it Possible to Transfer Assets Out of an Irrevocable Trust After Setting It Up?
Despite the many use cases and inherent defensibility of an irrevocable trust, many trust grantors worry about the unchangeability of these vehicles. After all, what if you do want to make an adjustment to the trust’s terms or beneficiaries later on?
They also worry whether they can transfer assets out of an irrevocable trust after setting it up.
Naturally, if you set up your irrevocable trust to make regular distributions to you or other beneficiaries, assets will be transferred out of the trust at normal intervals. But imagine that you mean transferring assets out of the trust outside its normal parameters.
Technically, irrevocable trusts can allow unusual or unexpected asset transfers to some extent, though there are only two ways in which this can occur.
Your Trust Includes Provisions for Asset Transfers (Not Recommended)
First, you can change an irrevocable trust if your trust includes various provisions for unexpected asset transfers.
Say you draft an irrevocable asset protection trust that normally doesn’t allow asset transfers outside of the normal distribution schedule.
However, the trust documents also include a provision that states something like, “The grantor, John Smith, can request the transfer of assets up to $1 million from the trust once per year, regardless of whether he has received his normal distribution yet or not.”
In theory, this could allow you to transfer assets out of the trust whenever you like. Hopefully, however, you already see the problem in terms of asset security.
If such provisions exist, they could act as windows through which courts, creditors, and lawyers can get access to your assets. If it's possible for you to demand an asset transfer from your so-called irrevocable trust, after all, why can’t you withdraw assets to pay for court bills or other legal fees?
Because of this mobility, it’s never recommended that you include extra asset transfer provisions within your irrevocable trust documents.
You Work with Other Beneficiaries to Transfer Assets Out
The other situation in which assets can be transferred out of an irrevocable trust is when you and any other beneficiaries get together, agree that assets need to be transferred out, then petition a court to do so. Depending on the documents of your trust, the trustee might need to be involved, as well.
It's because the trustee has a fiduciary duty to manage the trust according to its best interests. When you set up the trust, the document outlines the purpose of the trust, what it's meant to do, and so on.
For the trustee to make a change to the trust or transfer assets out of it, the trustee needs to be convinced that it's in the best interests of the beneficiaries and according to the wishes of the original grantor.
This can be harder than you think, especially if there are many beneficiaries attached to the irrevocable trust. Getting everyone to agree that an asset transfer is necessary could take a lot of time and effort. On top of that, the trustee might not agree with your request for an asset transfer.
In short, a lot of things have to go right for you to transfer assets out of an irrevocable trust (at least, a trust that's properly set up for overall asset protection).
Avoiding Asset Transfer Issues with an Irrevocable Trust
Because of the vulnerabilities or difficulties involved with transferring assets out of an irrevocable trust, it’s best to avoid having to do it in the first place. You can do that by:
- Working with trust set-up specialists like Dominion
- Defining the terms of your trust carefully
- Figuring out the distribution schedule and requirements of the trust properly beforehand so you never need to make unexpected asset transfers at all
If you do all this, your irrevocable trust can be the shield it is meant to be and you’ll achieve all of your financial or estate planning goals in perpetuity.
Furthermore, remember that you can always set up different trusts or take distributions and money from an original irrevocable trust, then put those assets into a different trust for another beneficiary if needed later on. Your first irrevocable trust doesn’t have to be the only one you set up.
Indeed, depending on your long-term asset protection strategy, it might be wiser to set up a new irrevocable trust for a different set of beneficiaries or another set of goals if your strategy changes. That way, your original trust can continue to operate as you originally envisioned, and you don’t have to go through the hassle of breaching the trust or getting all the beneficiaries to agree to achieve your new goals.
Decanting Your Irrevocable Trust: A Less Messy Option
Now, let’s say modifying or getting court approval for asset transfers out of your irrevocable trust sounds like a major headache (because, frankly, it is). You might be wondering if there’s a simpler way to go about things. The answer is maybe. Depending on the laws of your state, you might be able to decant your trust.
Decanting is putting the contents of your old trust into a new trust. This lets you change the terms of the trust without court approval or beneficiary consent, so long as the new trust benefits the same beneficiaries.
You can change trustees, update investment provisions, or even add or remove beneficiaries (within reason). It’s a handy tool for adapting your trust to changing circumstances, but it’s not available everywhere and comes with its own set of rules and restrictions.
Contact Dominion Today
In most cases, you can’t transfer assets out of an irrevocable trust, especially a trust that you set up to be durable against legal hazards.
That said, there are some cases or circumstances where asset transfers might be possible, but you should never undertake these asset transfers without first consulting your legal advisers.
At Dominion, we operate as partners for your irrevocable asset protection trust from start to finish.
Therefore, not only will we ensure that you won’t need it to take assets out of your trust at all, but we’ll also be there to answer any questions you have about irrevocable trusts, asset transfers, and distributions.
In short, we’re the best people to partner with when it comes to the long-term security and effectiveness of your asset protection plan. Contact us today to learn more.
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