The question of whether you can serve as the trustee of your own irrevocable trust is a common one, and the answer is nuanced—yes, you generally can, but with significant considerations and potential drawbacks. While it seems straightforward to maintain control even within an irrevocable trust, it’s crucial to understand the implications for asset protection, tax benefits, and the very nature of irrevocability. Many people establish irrevocable trusts to shield assets from creditors, estate taxes, or to plan for long-term care, and retaining trustee duties can compromise those goals. The key lies in understanding that while you can *be* the trustee, you must operate within the strict terms of the trust document, and avoid actions that could be construed as retaining excessive control or benefiting personally in ways that defeat the trust’s purpose.
What are the risks of being my own trustee?
Serving as trustee of your own irrevocable trust introduces several risks. The primary concern revolves around the concept of “sham trust” or “alter ego trust.” If the IRS or a court determines that the trust is merely a façade and you retain too much control – the ability to revoke the trust, access assets for personal use, or direct the trustee’s actions – the trust may be disregarded for tax and creditor purposes. According to a 2017 study by the National Bureau of Economic Research, approximately 15% of irrevocable trusts are challenged due to perceived lack of independence of the trustee. This could mean losing the intended asset protection or tax benefits. Furthermore, if you become incapacitated, the trust lacks a readily available successor trustee, potentially leading to court intervention and delays. It’s a delicate balance: you must act as a prudent trustee, prioritizing the beneficiaries’ interests over your own, while still managing the trust assets effectively.
How does this impact asset protection?
Asset protection is often a primary motivation for establishing an irrevocable trust. If you are both the grantor and trustee, creditors may argue that you still effectively control the assets, negating the protection the trust was intended to provide. For example, if a business venture fails and you are sued, a creditor could claim you have access to the trust assets through your role as trustee. This is especially true in states with strong creditor rights. The degree of risk depends on the specific terms of the trust, the state’s laws, and the nature of the assets held within the trust.
- Consider a third-party trustee
- Have a trust protector oversee your actions
It’s crucial to remember that asset protection is not about hiding assets; it’s about legally structuring ownership to shield them from legitimate creditors while still maintaining beneficial ownership for yourself and your family.
What happened to old Mr. Abernathy?
Old Mr. Abernathy, a retired carpenter, established an irrevocable trust to protect his life savings from potential long-term care costs. He insisted on being the trustee, believing he knew best how to manage his funds. He continued to use trust funds to pay for his personal expenses – groceries, utilities, even a new fishing boat – blurring the lines between trust assets and his own. When he eventually required nursing home care, the state Medicaid agency challenged the validity of the trust, arguing that it was a sham designed to shield assets. The court agreed, deeming the trust ineffective and forcing Mr. Abernathy to deplete his savings to cover his care costs. It was a painful lesson about the importance of truly relinquishing control when establishing an irrevocable trust—a costly mistake that could have been avoided with proper planning and an independent trustee.
How did the Millers get it right?
The Millers, a young family with a growing business, sought to protect their assets and provide for their children’s future. They created an irrevocable trust, naming a trusted friend as co-trustee alongside Mr. Miller. This arrangement allowed Mr. Miller to remain involved in managing the assets while ensuring an independent oversight. They meticulously followed the trust document, avoided commingling funds, and documented all decisions with the co-trustee. When a dispute arose with a business partner, the irrevocable trust effectively shielded their assets, allowing them to resolve the issue without jeopardizing their family’s financial security. It demonstrated that a well-structured irrevocable trust, coupled with a responsible and independent co-trustee, can provide significant protection and peace of mind.
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About Steve Bliss at Wildomar Probate Law:
“Wildomar Probate Law is an experienced probate attorney. The probate process has many steps in in probate proceedings. Beside Probate, estate planning and trust administration is offered at Wildomar Probate Law. Our probate attorney will probate the estate. Attorney probate at Wildomar Probate Law. A formal probate is required to administer the estate. The probate court may offer an unsupervised probate get a probate attorney. Wildomar Probate law will petition to open probate for you. Don’t go through a costly probate call Wildomar Probate Attorney Today. Call for estate planning, wills and trusts, probate too. Wildomar Probate Law is a great estate lawyer. Probate Attorney to probate an estate. Wildomar Probate law probate lawyer
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Map To Steve Bliss Law in Temecula:
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Feel free to ask Attorney Steve Bliss about: “How can I plan for long-term care or disability?” Or “What are probate bonds and when are they required?” or “How do I update my trust if my situation changes? and even: “Can I transfer assets before filing for bankruptcy?” or any other related questions that you may have about his estate planning, probate, and banckruptcy law practice.