An irrevocable trust is a type of trust that cannot be altered, amended or revoked once it has been established. In Australia, irrevocable trusts are commonly used for estate planning and asset protection purposes. In this blog we cover everything you need to know about irrevocable trust.
There are different types of trusts for different purposes. A trust requires a trustee to manage and hold property for the benefit of third parties who are known as beneficiaries. This implies that trusts are useful in managing estates and ensuring that the property of the creator of the trust is being used only in the way the creator wants even after their death, and not all trusts can be changed or revoked.
This type of trust are trusts where the creator or settlor of the trust can change as per their will. They can choose to remove or add beneficiaries, reduce their benefits, alter the trust deeds or even terminate it. Under section 102 of the Income Tax Assessment Act 1936, these types of trusts generally allow the creator to control the property where;
- the settlor has control over the trust and receives benefits of the income produced by the trust or;
- the income from the trust is for the settlor’s children who are under the age of 18.
The trustee must also pay the respective tax on the income generated.
Irrevocable trusts are created by transferring ownership of assets from the trust creator (the settlor) to the trust (the trust estate). The settlor will appoint a trustee to manage and control the trust estate for the benefit of the beneficiaries. The trustee has a legal obligation to manage the trust in accordance with the terms of the trust deed and the provisions of the Trustee Act 1925 (Cth). There will also be no mention of revocation rights for any party in the trust deed, and the only way to alter or revoke the trust is for all beneficiaries to agree to do so.
Advantages of Irrevocable Trusts
One of the main benefits of an irrevocable trust is that the assets held in the trust are protected from creditors and other claims. For example, if the settlor is facing financial difficulties or is at risk of being sued, the assets held in the trust will be protected as they are no longer considered to be owned by the settlor. This can provide peace of mind to the settlor, who knows that their assets will be protected even if they face financial difficulties in the future.
Irrevocable trusts can also be used for estate planning purposes. The settlor can specify how their assets will be distributed after their death, ensuring that their wishes are followed. For example, if the settlor has children from a previous marriage, they may wish to provide for their children in a way that is separate from their current spouse. In this situation, an irrevocable trust can be used to hold assets for the benefit of the children from the previous marriage, without the risk of those assets being claimed by the current spouse.
Another benefit of irrevocable trusts is that they can be used to minimize tax liabilities. For example, if the settlor is concerned about the potential capital gains tax liability from selling an asset, they can transfer that asset to an irrevocable trust. The capital gains tax liability will then be incurred by the trust, rather than by the settlor, potentially reducing the overall tax liability.
Disadvantages of Irrevocable Trusts
The obvious disadvantage of an irrevocable trust is that the settlor cannot change their mind at a later stage and will not have any control over the trust once they create it. These trusts can also be expensive and complex to set up and maintain.
It is important to note that while the assets held in an irrevocable trust are protected, the settlor may still have obligations to the trust. For example, the settlor may still be required to pay tax on income generated by the trust, or may be required to provide financial support to the trust if it is facing financial difficulties.
There are also restrictions on the use of irrevocable trusts in Australia. For example, the trust deed must not contain provisions that are illegal, or that are against public policy. Additionally, the trust must not be used for fraudulent purposes, such as to hide assets from creditors or to evade taxes.
An irrevocable trust can be a useful tool for estate planning and asset protection in Australia. But, it is important to understand the restrictions and obligations that come with it. By carefully considering the terms of the trust and the responsibilities of the trustee, a settlor can ensure that their assets are protected and that their wishes for the distribution of their assets are followed after their death.
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