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Unlocking the secrets of irrevocable trusts

Hey there, fellow Texans! Picture this: You're sitting on your porch, sipping sweet tea, and basking in the warm Texas sun. Life is good, but in the back of your mind, you wonder about protecting the legacy you've worked so hard to build. How do you ensure your family's financial future is as bright as a Lone Star night sky?

Well, we've got the answer for you: Irrevocable Trusts! These aren't just fancy legal terms; they're your ticket to safeguarding your assets and securing your loved ones' futures. But, hold your horses, because we're about to take you on a wild ride through the world of irrevocable trusts in Texas.

Short Answer: Irrevocable trusts in Texas are your secret weapon for asset protection and tax savings. Keep reading, and we'll spill the beans on how these trusts work their Texan magic!

Secrets of Irrevocable Trusts in Texas: Protecting Your Assets, One Lone Star at a Time

Sometimes you can run across legal terminology which doesn't require much of an explanation. Aside from the random Latin phrases which exist in American jurisprudence, there are words and phrases that you can use context clues to figure out what they mean. Relevant to today's blog post is an irrevocable trust. An irrevocable trust cannot be revoked once created. This is as opposed to a revocable trust which, shockingly, can be revoked by whoever created the trust. All of this is intuitive to most people. However, once you have figured out the basic difference between the words involved you need to figure out what it means to have a revocable or irrevocable trust and what the advantages of both are.

If figuring out the basic difference between revocable and irrevocable trusts was not hard, then learning the nuances of either can be more of a challenge. For example, let’s say that you create a revocable trust and intend for the property within the trust to benefit your grandchildren. You steadily contribute property to the trust and make sure that the trustee is investing the money wisely and providing updates to you and your adult children about the performance of those investments. Everything is going according to plan, and you are looking forward to the money being able to help your family later on.

However, one day you were moving the grass when a large tree limb fell on you in your backyard. The limb struck your head and incapacitated you. Now that you are unable to make decisions for yourself this has a major consequence for the trust and eventually for the beneficiaries of the trust- your children and grandchildren. Due to your incapacitation, the revocable trust has become irrevocable. While you created a revocable trust initially that trust can become irrevocable quickly. For that reason, you need to understand how an irrevocable trust works before beginning the estate planning process for you and your family.

When you are creating a trust the title given to you in that process is a grantor. Under most circumstances, if you are alive, you can change the trust as frequently as you would like. However, you need to have the capacity in a legal sense to make those changes. If you were to become incapacitated as we described in the paragraph before this one that would change the circumstances involved in your trust dramatically. In that situation, your trust would not be changeable and however you set up the trust initially would be how it would be until the trust expires or all property is distributed out of the trust- whichever occurs first.

Two people potentially could change the terms of the trust after you become incapacitated. However, you would need to take steps to be able to plan for this before creating the trust. The first would be to have a power of attorney over financial matters created. In that scenario you would be the principal and the power of attorney would be your agent. This person could make decisions related to financial matters in your life. Additionally, if you allowed for it, the trust could contain language which named a potential conservator for you if you became incapacitated. This is not the same thing as creating a guardian for you or your estate, however. For that, someone would need to file a petition in probate court to begin the legal process. If all you want is for someone to be able to make decisions in the realm of a trust then naming someone within the documents of the trust would be a good start.

You can make changes to an irrevocable trust

Despite what the name implies as well as what we shared with you at the outset of today's blog post, an irrevocable trust can be changed. The reason is that irrevocable trusts are viewed differently while the grantor is still living versus an irrevocable trust where the grantor is deceased. Trusts like this are often created to plan for government benefits, tax planning or simply protecting assets from the probate process. If you have specific questions about how a trust could benefit you then please reach out to the experienced estate planning attorneys with the Law Office of Bryan Fagan. We can help you schedule a free-of-charge consultation to speak with one of our attorneys about your particular circumstances.

Even if your trust is irrevocable, while you are living you will likely be able to update the trustee and perform other actions like changing beneficiaries. You can also change the termination date of the trust (if any) as well as other conditions which allow the property to be distributed to beneficiaries. What you also do when you create an irrevocable trust is giving other people the potential ability to change the trustee or beneficiaries to another person. You may even choose to allow a beneficiary of the trust to make these sorts of decisions. Allowing the beneficiaries some degree of autonomy over where their property would go if he or she were to pass away, for example, is a way to make changes within the trust without revoking it entirely.

A trust protector can also be appointed who has the authority to change the trustee or even make changes to the terms of the trust in some way. This gives the trust protector authority to perform actions within the trust that even you as grantor may not possess. In a special needs trust situation, the trust protector can make changes to the trust to account for the various government benefits received by the beneficiary. The government has rules in place that relate to a person's ability to receive those benefits while also receiving income from a trust. Were those rules to change at some point then you would need to update the terms of the trust to account for those changes.

If you haven't noticed by now, what is called irrevocable trusts are not exactly irrevocable any longer. The law has shifted and is much more permissive when it comes to allowing trustees and other authorized people to make changes to trusts as long as the grantor is still living. One of those changes allows an authorized person to take trust assets from Trust A and move them over into Trust B. This can be done under limited circumstances and only when all beneficiaries of the trust agree for this to occur.

What about taxes and trusts?

The way that revocable trusts are handled when it comes to taxes is much more straightforward than irrevocable trusts. If you were to create a revocable trust then your Social Security number would be used to create the trust and the income within the trust would be taxed to you personally. It can't get much simpler than that. However, were you to create an irrevocable trust then you would need to go through with some additional steps to comply with our friends at the IRS. When you intend to create an irrevocable trust, you would first need to obtain a Tax ID number and file an annual tax return using a special form from the IRS. An irrevocable trust has high tax burdens relative to earned income that you and I pay on our federal taxes each year. There is a top rate that is reached after the income of the trust approaches approximately $15,000. Keep in mind, however, that most irrevocable trusts do not pay income tax if the property is being disbursed with some regularity.

Capital gains on the sale of property within a revocable or irrevocable trust are also handled differently. Let’s say that you are the grantor of a revocable trust. A vacation home is owned by the trust and therefore is titled not to you personally but rather to the name of your trust. The necessary steps are taken, and the house is sold. This may worry you that the trust will have to pay capital gains taxes on the full amount of the sale proceeds. However, there is a $250,000 exclusion that the house would qualify for. Depending on the value of the home this could allow you to not pay taxes on any portion of the sale or at least on a reduced portion of the sales price.

If you are the grantor of a revocable trust and you pass away, then that trust property would be able to take advantage of a stepped-up basis. Instead of being taxed based on the difference between the value back when the trust was created and what it is today, the basis would be stepped up to what the value was at the time of your passing. Therefore, there would be no capital gains tax to pay at all. When you pass away as the grantor of an irrevocable trust then that stepped-up basis is not a given.

Suppose that it isn’t you as the grantor who passes away but rather the beneficiary of the trust who passes. Hypothetically speaking, let’s say that it is your spouse who passes away as the beneficiary of the trust. If you pass away first, then a stepped-up basis occurs. However, there would not be a secondary step up when the beneficiary passes away. The same principle applies when your child as beneficiary of a trust passes away and the property is then distributed to your grandchildren.

How are beneficiaries treated when it comes to a trust?

Every trust, once created, has beneficiaries who are currently receiving income from the trust as well as future beneficiaries who are not receiving any income right now but still have future interests in that income. Both classes of beneficiaries have rights about the trust. A future beneficiary has those rights beginning at the death of a beneficiary who is currently named in the trust or is currently receiving income. The example we gave earlier is about your child being named as a beneficiary, but a grandchild has been born who would be able to receive any residual income from the trust after your child passes away.

In a revocable trust situation, a future beneficiary has no rights because you as the grantor would be able to always be able to update or change the trust where that future beneficiary may no longer be a beneficiary. A beneficiary of this sort wouldn't have a right to see a copy of the trust, access the property to know what is contained therein or know that he or she is named in a trust.

On the other hand, any beneficiaries under an irrevocable trust may have rights that depend upon whether their interests in the trust have become vested. Contained within the terms of a trust, there could be language that allows a person to be able to appoint additional beneficiaries or remove a beneficiary based on certain circumstances. In that type of situation then the interests of a future beneficiary can be eliminated outright and would not be vested. In this situation, a future beneficiary would have no rights as to this trust.

A future vested beneficiary does have rights, however, to trust in this situation. A trustee whose trust has future vested beneficiaries must consider these interests when making trust distributions to current beneficiaries. Additionally, a future beneficiary whose rights are vested can view the documents which created the trust, to know who acts as trustee and even to view the financials under certain circumstances.

Let's walk through a hypothetical situation to better illustrate this point. Let's suppose that you create trust for the benefit of your spouse. You both are in your late 60s and have a family. As a part of creating a trust for your spouse’s benefit, you have provided her with a power of appointment. Furthermore, let's assume that your spouse does not ever exercise her ability to appoint people as beneficiaries to your trust. In that case, the trust would continue after she passes away to benefit your three children. Each of your children has the power of appointment over their share. However, if none of your children use that power of appointment then their shares will pass on to their children once all your children have passed away.

Once you pass away your wife would become the lifetime beneficiary under the trust. Your children's interests in the trust would not have been vested because your wife still can remove them as a beneficiary based on her power of appointment. Your children would have what is known as a limited interest in the trust. However, once your wife passes away then your three children will become the primary beneficiaries of the trust. In this scenario, your grandchildren would have limited interest in the trust given that your children can make appointments regarding their shares.

For example, if your middle child passes away then your grandchildren from that child would have vested interests in the trust even though they would not be able to receive property out of the trust until your other two children have passed away. Despite this, those grandchildren would also be able to review the trust documents, and accounts of the trust and receive information about any trustees who serve the trust. At the end of the day, there are significant differences between revocable and irrevocable trust when it comes to the interests of beneficiaries and future beneficiaries.

You need to ask yourself the question of where does this leave you and your family when it comes to the creation of a trust? The property that you have worked hard to accumulate and fund the trust with should not be wasted unnecessarily. Your goal in creating the trust likely is to have a steady stream of income for your family both now and in the future. If you can benefit future generations by having this trust created, then that would be ideal. However, you can see that there are pros and cons associated with trust creation which you should think critically about before entering.

This is where having an experienced estate planning attorney can come in handy for you and your family. Rather than guessing which would be the most ideal for your family, you can create a circumstance where you work with someone who has advised people in your position previously and can give you advice and perspective that you otherwise would not have. We thank you for joining us here on our blog today and we hope that you will join us again tomorrow as we continue to share interesting and relevant information about the world of wills, trusts, and estate planning generally.

Understanding Irrevocable Trusts in Texas

In the world of estate planning, one term that often comes up is "irrevocable trust." If you're a Texan looking to protect your assets and plan for the future, it's crucial to understand what an irrevocable trust is and how it can benefit you and your loved ones. In this comprehensive article, we'll dive deep into the world of irrevocable trusts in Texas, exploring their advantages, disadvantages, and everything in between.

Types of Trusts

Before we delve into the specifics of irrevocable trusts, let's first take a moment to understand the broader landscape of trusts. In Texas, as in other states, there are various types of trusts designed to serve different purposes. These include:

Living Trusts

A living trust, also known as a revocable trust, allows you to maintain control of your assets during your lifetime and determine how they'll be distributed after your passing.

Testamentary Trusts

These trusts are established through your will and come into effect after your death, often used to provide for minor children or beneficiaries with specific needs.

Special Needs Trusts

Special needs trusts are designed to support individuals with disabilities while preserving their eligibility for government benefits.

Charitable Trusts

Charitable trusts are created to support charitable organizations or causes, allowing you to leave a lasting legacy.

Now that we have a brief overview of trust types, let's focus on the star of our discussion: irrevocable trusts.

Irrevocable Trust Advantages and Disadvantages


Irrevocable trusts offer several compelling advantages, especially in the context of estate planning in Texas:

  1. Asset Protection: Perhaps the most significant advantage of an irrevocable trust is asset protection. When you place assets in an irrevocable trust, they are no longer considered part of your estate. This can shield them from creditors and legal claims.
  2. Tax Planning: Irrevocable trusts can be powerful tools for tax planning. In Texas, this can include strategies to reduce estate taxes and even protect your assets from high capital gains taxes.
  3. Medicaid Eligibility: If you anticipate needing Medicaid in the future for long-term care, an irrevocable trust can help you meet the eligibility criteria while preserving your assets.

Advantages of Irrevocable Trusts

Disadvantages of Irrevocable Trusts

Asset Protection: Irrevocable trusts shield assets from creditors and legal claims.

Loss of Control: Once established, you lose control over the assets placed in the trust.

Tax Planning: They offer powerful tax planning tools, reducing estate taxes and protecting assets from high capital gains taxes.

Complexity: Managing irrevocable trusts can be complex, requiring professional guidance.

Medicaid Eligibility: Irrevocable trusts help meet Medicaid eligibility criteria while preserving assets.

Costs: Creating and maintaining irrevocable trusts may involve legal and administrative expenses.


While irrevocable trusts offer substantial benefits, they also come with certain drawbacks:

  1. Loss of Control: Once you create an irrevocable trust, you typically lose control over the assets placed in it. You cannot make changes or revoke the trust without the consent of the beneficiaries.
  2. Complexity: Managing an irrevocable trust can be complex and requires careful planning. It's essential to work closely with an experienced attorney to navigate the legal requirements effectively.
  3. Costs: Establishing and maintaining an irrevocable trust can involve fees, including legal and administrative costs. However, these expenses are often outweighed by the potential benefits.

Trustee Responsibilities

In any trust, the trustee plays a crucial role in managing trust assets and ensuring the trust's goals are met. Trustees must act in the best interests of the beneficiaries and adhere to the terms of the trust. In Texas, trustees have fiduciary duties that include prudent management of assets and accurate record-keeping.

Estate Planning Strategies

Estate planning involves more than just trusts. Texans should also consider other essential components, such as wills, powers of attorney, and advance healthcare directives. These documents work together to create a comprehensive estate plan tailored to your needs.

Tax Planning in Irrevocable Trusts

When it comes to tax planning in Texas, irrevocable trusts offer specific benefits. For instance, Grantor Retained Annuity Trusts (GRATs) and Intentionally Defective Grantor Trusts (IDGTs) can be powerful tools to minimize taxes on wealth transfer and asset appreciation.

Trust Modification and Termination

One common misconception is that irrevocable trusts are entirely inflexible. While they are indeed designed to be challenging to change, there are circumstances under which a trust can be modified or even terminated. These situations often involve court approval and careful consideration of the trust's purpose.

Special Needs Trusts

In Texas, special needs trusts are critical for individuals with disabilities. These trusts allow you to provide financial support without jeopardizing their eligibility for essential government benefits like Medicaid.

Gift and Estate Tax Implications

Texans should be aware of the potential gift and estate tax consequences of creating and funding trusts. Currently, there are exemption limits that impact your tax liability, and understanding these limits is vital for effective estate planning.

Trust Administration

Trust administration involves various responsibilities, from maintaining accurate records to filing tax returns. Ensuring that the trust is administered correctly is essential to achieving your intended outcomes.

Choosing Trustees and Protectors

Selecting the right trustee and, when appropriate, trust protectors, is a crucial decision in the trust creation process. Trustees and protectors have distinct roles and fiduciary duties, and choosing individuals who can fulfill these roles effectively is essential.

Beneficiary Rights and Interests

Understanding the rights of trust beneficiaries is essential, especially in Texas, where beneficiaries may have varying degrees of control and access to trust information. Knowing what beneficiaries are entitled to can help avoid potential conflicts.

Legal Counsel in Estate Planning

Navigating the complexities of estate planning, including the creation and management of trusts, requires the expertise of an experienced estate planning attorney. Consulting with an attorney ensures that your plan aligns with Texas laws and serves your best interests.

Recent Legal Changes

Estate planning laws are not static, and they can change over time. It's essential to stay informed about any recent legal changes that may affect your trust and estate planning strategies.

Case Studies and Examples

To bring the concepts discussed to life, let's explore a few case studies and real-life examples of how trusts, including irrevocable trusts, have been used effectively in various family and financial situations in Texas.

In conclusion, understanding irrevocable trusts in Texas is crucial for effective estate planning and asset protection. While these trusts come with advantages and disadvantages, they can be powerful tools when used strategically. Remember that estate planning is a complex process, and seeking the guidance of an experienced attorney is the best way to ensure that your plan aligns with your goals and the laws of the Lone Star State.

In Closing: Wrangling the Wild World of Texas Irrevocable Trusts

Well, y'all, we've reached the end of our trusty trail through the captivating world of irrevocable trusts in the great state of Texas. Just like a Texan sunset, our journey has been both stunning and enlightening.

Short Answer: Irrevocable trusts are your trusty sidekick for a secure financial future in the Lone Star State. But wait, there's more!

As we say adios, remember this: while irrevocable trusts might seem as intricate as a two-step dance, they're your partner in protecting what matters most—your assets and your family's legacy. So saddle up, reach out to an experienced estate planning attorney, and let the Texas-sized benefits of irrevocable trusts shine down on you like a Lone Star.

Now go out there and lasso your financial dreams, fellow Texans! Until next time, keep ridin' high and smilin' wide.

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Frequently Asked Questions about Irrevocable Trusts


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