What Are the Dangers and Disadvantages of an Irrevocable Trust?

As you research wealth protection and preservation, you might come upon irrevocable trusts. These durable, highly effective instruments can successfully defend the wealth of high-net-worth individuals like yourself against all types of legal threats, like lawsuits, creditors, etc.

But before you start contacting legal experts to set up an irrevocable trust, it’s a good idea to know what to expect and whether there are any potential disadvantages you should consider. Let’s take a closer look.

What is an Irrevocable Trust?

An irrevocable trust is simply a trust instrument that can’t be changed or modified by the grantor after it is set up. So, for instance, say you set up an irrevocable trust with three different beneficiaries: you and your two children.

But a few years later, you want to add a new beneficiary to the trust. Since it’s irrevocable, you don’t have the power to put the beneficiary on the trust list.

This isn’t to say that irrevocable trusts can’t be changed whatsoever. There are some limited circumstances in which modifications to irrevocable trusts are possible. Still, it’s undeniable that irrevocable trusts are much more difficult to change compared to revocable trusts.

Irrevocable trusts are not just legal instruments, they are strategic tools for wealth preservation. According to a US Global Wealth Management survey, 34% of ultra-high-net-worth individuals utilize irrevocable trusts for estate planning and asset protection. This is due in part to their solid defense against creditors.

What’s more, another 16% said they plan on setting up irrevocable trusts in the next 5 years. Again, the key lies in their “untouchable” status: once assets are placed in an irrevocable trust, they are legally separated from the grantor, making them virtually impervious to lawsuits, bankruptcies, and other financial perils. As we will see in the coming discussion, irrevocability is a potential advantage for irrevocable trusts.

Irrevocable vs. Revocable Trust

A revocable trust is the opposite of an irrevocable trust: it can be changed by the trust grantor or originator.

Let’s return to the original example. Say that you have three beneficiaries for your current revocable trust. If you ever want to add another beneficiary to the list, you can do that with the assistance of your attorney. That’s it!

Of course, revocable trusts, being so changeable, are much more vulnerable to legal attacks. Any assets that you put into a revocable trust are not truly secure. A simple court order, creditor claim, or other potential attack could be all that’s needed to breach the trust and take the assets within.

For this reason above all else, revocable trusts are not usually leveraged for asset protection. If you're a high-net-worth individual and want to make sure your estate doesn't come under fire from aggressive creditors or unsubstantiated lawsuits, a revocable trust is decidedly not the way to go.

Possible Downsides to an Irrevocable Trust

Even though an irrevocable trust can be a very valuable instrument, you need to understand the possible disadvantages you might face when you set one up. 

At Dominion, we believe in our clients having all the information available as they make decisions about their wealth protection. Once you fully grasp irrevocable trusts, you’ll know whether or not these are the right instruments for you.

No More Control Over Assets

Naturally, the biggest downside to an irrevocable trust is the fact that you don’t have any control over your assets. With a living, revocable trust (one of the most common trust instruments overall), you technically hand over control of your assets to a trusted third party called the trustee.

However, you retain some amount of power to modify the terms of the trust, change the beneficiaries, etc. For many trust grantors, this can provide a certain amount of peace of mind. Your assets are never truly out of reach. The opposite is true for an irrevocable trust.

Very Difficult to Change

In keeping with the above, an irrevocable trust is incredibly difficult to change. Technically, you could change the terms of an irrevocable by a court order under limited circumstances.

Furthermore, modification by consent of all beneficiaries for a trust is sometimes possible. If a trust needs to be modified for the benefit of all beneficiaries, and all the beneficiaries agree with the proposed change, an irrevocable trust could shift to suit their needs.

However, the basic rule – that an irrevocable trust can’t be changed – is broadly true. Because of this, you need to know exactly what you want the trust to do and make sure the trust language is perfect and airtight before you sign the documents. 

You only get one chance to get it right, which is why it’s a good idea to work with the experienced, specialized attorneys and financial experts at Dominion.

You Need to Trust Your Trustee Immensely

Every trust requires you to place a good deal of faith in your appointed trustee. After all, the trustee is the individual or company that will be responsible for managing the trust and distributing its assets.

But this is even more important for an irrevocable trust. Assuming you don’t appoint a trust protector (which is never really a good idea), the trustee is the entity ultimately responsible for the trust and the one with all the power.

If your trustee isn’t chosen correctly, they could manage your trust against your will (even if they abide by the letter of the trust documents). 

To that end, you should only set up an irrevocable trust with knowledgeable attorneys who have a reputation for success and who are known for managing irrevocable trusts to perfection.

Irrevocable Trusts Might Still Be Worthwhile

Even with the above downsides, we need to reiterate that irrevocable trusts can still be worthwhile in certain situations.

Say that you want to make sure that you can’t be compelled to take assets out of the trust against your will. You're an entrepreneur, and you are being sued by a disgruntled customer who thinks they have a right to millions of your dollars.

If your assets are stored in an irrevocable trust, it won’t matter if the lawsuit plaintiff is successful. You will not have the legal ability to comply with a court order demanding that you pay damages via those assets.

Seen in this light, irrevocable trusts themselves are not disadvantaged. Instead, it’s best to think of irrevocable trusts as specialized instruments you should only use in specific circumstances.

As an example, the asset protection trusts we set up at Dominion are irrevocable by design. The last thing we want is for your trust to be changeable by you or some other third party at the whim of a court or a creditor.

If your asset protection trust is revocable, it's a trivial matter for a judge to order you to modify your trust, take money out of the trust, change the beneficiary, etc. 

On the flip side, if your asset protection trust is irrevocable, it's practically impossible for a court to order the same thing, even if they believe they have legal standing to do so.

With a strong, binding, irrevocable asset protection created by Dominion, a judge will not be able to order you to turn over assets you don’t have control over. Even better, it won’t be in your power to take control of those assets under any circumstances not outlined in the trust documents.

Get in Touch with Dominion Today

Ultimately, even with the potential downsides of an irrevocable trust, this instrument is still the superior choice for wealth protection compared to its revocable counterpart. 

So long as you set up your irrevocable trust properly, and so long as you have faith in your trustee, your irrevocable trust won’t need to be modified, and you can go about your business with total confidence that you and your beneficiaries will receive the distributions you need.

At Dominion, we specialize in crafting custom asset protection irrevocable trusts for each of our clients. The trusts we create can protect your wealth and preserve it for a long time to come through smart investments and distribution policies. To learn more, contact us today.