Hilary Muza 
FOR some, life can be viewed as a race for accumulation. Accumulation of accolades, achievements and wealth. When wealth has been amassed, however, attention naturally turns to how to preserve that wealth, most times for posterity.
Last week I addressed how trusts can be utilised as effective asset management tools. In this installment, I take a deeper look at how revocable and irrevocable trusts can be used to best advantage for those looking to manage their assets.
What is an irrevocable trust?
This is a trust that cannot be cancelled or easily changed after creation. The grantor (the person who creates the trust often also described as the settlor or founder) loses access to and control over assets once the trust is founded. It cannot be modified, amended or terminated without the trustees’ and/or beneficiaries’ permission. Because assets then become owned by the trust, irrevocable trusts are often used for asset protection.
Why choose an irrevocable trust?
There must be a meaningful benefit for opting for an irrevocable trust. Not being able to revoke the trust is part of a trade-off that comes with several other benefits. The most direct benefit is that the assets move out of the grantor’s estate in an irrevocable trust. By contrast, the grantor’s assets stay in the estate in a revocable trust.
The primary reasoning behind the irrevocable trust is that there are many good reasons for clients to want to move assets out of their estate.
A typical example would be that should creditors pursue the assets of the grantor, the assets placed within an irrevocable trust will not be available to liquidate any such debt or claim.
The assets technically do not belong to the grantor, so if they get sued, those assets are beyond the reach of a legal judgment.
Moreover, irrevocable trusts reduce the possibility of running into high estate tax bills. Giving an asset to an irrevocable trust is the same as giving it to one’s heir.
Trust property can still be sold even if it is still in the trust, just so long as the proceeds of the property are put back into the trust.
Asset protection
Because an irrevocable trust moves those assets out of the trustmaker’s hands, and the grantor is no longer considered to own them. An independent trustee makes all the decisions regarding investments on behalf of all the trustees, which may or may not include the grantor.
Revocable trusts
These can be easily modified or dissolved anytime should the grantor decide to do so. These are flexible trusts in that the grantor can exercise control over trust assets. The main drawback is that these assets can be regarded as the grantor’s assets for the purposes of recovery of debts and other associated legal proceedings. Revocable trusts are also known as living trusts, which is a trust that holds one’s assets while they are alive. It can also explicitly detail one’s wishes for the assets held in trust after their passing away.
A revocable trust specifically works well for a client who does not have serious tax issues, but wants to maintain control of his or her assets.
There is, however, one other scenario in which they can make a lot of sense: for a client who fears he or she will eventually be mentally incapacitated, whether that’s because of family history or for some other reason.
If the grantor of a revocable trust becomes incapable of managing his or her affairs, the designated trustees step in to handle the assets. The trust can even set forth specific steps and guidelines that the successor trustees must carry out.
The same principle applies to someone who wants to keep control of their assets until their passing on. It can be provided for in a trust deed that the assets of the trust fall under the complete control of the trustees upon the death of the grantor.
That, then, might be the ideal candidate for a revocable trust: a client who wants to maintain control over his or her assets, right up until the moment he or she can no longer mentally handle the job, or until their demise at which point the designated trustees are ready to step in. In most other instances, the irrevocable trusts make more long-term financial sense.
Key takeaways
Revocable, or living, trusts can be modified after they are created.
Revocable trusts are easier to set up than irrevocable trusts.
Irrevocable trusts cannot be modified after they are created, or at least they are very difficult to modify.
Irrevocable trusts offer tax-shelter benefits that revocable trusts do not.
Irrevocable trusts may be good for individuals whose jobs may put them at higher risk of a lawsuit.
Muza is a duly admitted lawyer with expertise in business law, labour law and commercial litigation. He writes in his personal capacity. For feedback, email him at hilarykmuza@gmail.com or call on +263719042628.
