Irrevocable trusts exist to remove money from the estate of the creator--called the grantor--of the trust. This helps to lower potential estate tax ramifications. Because this type of trust is meant as a tax shelter, removing money from an irrevocable trust can be nearly impossible for the grantor and difficult for the trustee. Different rules exist to remove funds for the person who operates the trust--the trustee--than for the grantor.
Removal by Grantor
Read the trust. Trust language can prohibit or allow withdrawals from an irrevocable trust. Look for the terms "trust protector" or "powers of appointment" for clues to change trust provisions to help you remove funds. Some trusts are built with special provisions allowing removal of funds. An attorney may be able to help you ascertain whether provisions exist to remove money if the language is too complicated.
Check for insurance inside the trust. Life insurance policies are the funding mechanism of many trusts. Trusts and life insurance policies may be established using a family split-dollar arrangement so a spouse owns and may remove the cash value of a policy while the trust owns the death benefit. The grantor may also discontinue payments, lapsing the policy and freeing up funding dollars.
Look for alternatives. Some trusts are funded through ongoing payments. Funds may be withheld before being gifted to the trust. Living on these dollars may be easier than attempting to move dollars out of the trust. Beneficiaries may remove money as instructed in the trust document.
Think about taxation and lawsuits. Money removed from an irrevocable trust is included in the estate of the grantor and also opens the grantor up to lawsuits filed by beneficiaries. By law, money inside an irrevocable trust has already been gifted to beneficiaries, so they may sue you for removing money which is legally theirs.
Ask the beneficiaries to amend the trust. According to the California Society of CPAs, the IRS routinely approves trust modifications when all beneficiaries agree to the change.
Removal by Trustee
Inform the asset-management company of the death of the settlor--the person who set up the trust. Beneficiaries must receive a notice informing them of their right to see the terms of the trust. The asset-management firm will request beneficiary information from you to disburse funds.
Keep records of all of your actions to remove funds from the trust. Fill out all asset-transfer forms sent by the management firm completely and quickly. Asset management companies will routinely set up holding accounts for beneficiaries to disburse payouts.
Inform beneficiaries of the process. This will help you to avoid conflicts with beneficiaries while you work to remove money. Often assets need to be sold and trust provisions need to be followed by the asset management firm.
Work with the asset company to move assets to the beneficiaries according to the terms of the trust. Work with an attorney to ensure that you’re following the trust's terms specifically to avoid lawsuits from the beneficiaries.
This is a complicated process. Find a competent estate attorney to walk you through all of your legal options before removing money from an irrevocable trust.
If you are a trustee and the grantor is pressuring you to remove funds from the trust, remember that your allegiance is to the trust and the beneficiaries. Legally, trust assets belong to the beneficiaries.
- TAX TIME image by brelsbil from Fotolia.com