Can You Take Property Out of a Trust in New York?

Whether or not you can take property out of a trust in New York depends on the type of trust. Is it a revocable or irrevocable trust? In a revocable trust, property can be easily taken out of the trust. In an irrevocable trust, however, property cannot generally be taken out of the trust without the unanimous consent of the beneficiaries. However, there are rare instances when property can be taken out of an irrevocable trust.

How to Determine Whether a Trust is Revocable or Irrevocable

To determine whether a trust is revocable or irrevocable, it is essential to review the trust document and examine the specific language used to establish the trust. Usually, the title given to the trust itself will identify whether the trust is revocable or not.

In case the title is silent, in a revocable trust, the trust document will typically include language such as "this trust may be amended, modified, or revoked by the settlor/grantor at any time" or "the settlor/grantor reserves the right to alter, amend, or terminate this trust." This language indicates that the grantor has the power to change the terms of the trust, including the ability to remove property from the trust, as long as they are mentally competent.

On the other hand, an irrevocable trust will contain language that emphasizes the permanent nature of the trust and the settlor's relinquishment of control over the trust assets. The trust document may include phrases such as "this trust is irrevocable and cannot be amended, modified, or revoked by the settlor/grantor" or "the settlor/grantor hereby irrevocably transfers and assigns the following property to the trust." In addition, a revocable trust allows the grantor to chagne the trustee and the beneficiaries at any time, if these persons are not him.

In addition to reviewing the trust document, it is essential to consider the context in which the trust was created. Revocable trusts are often used as part of an estate planning strategy to avoid probate and maintain flexibility, while irrevocable trusts are commonly used for asset protection, tax planning, and Medicaid eligibility purposes.

If there is any ambiguity in the trust document regarding the revocability of the trust, it may be necessary to consult with an estate planning attorney like us to interpret the language and determine the grantor's intent. We can review the trust document in its entirety, consider the surrounding circumstances, and provide guidance on whether the trust is revocable or irrevocable based on the applicable laws and the specific terms of the trust.

Can You Take a Property Out of a Trust?

From a legal perspective, revocable trusts allow the grantor to maintain control over the trust assets and modify the terms of the trust, including removing property from the trust. In most revocable trusts, the grantor, the trustee, and the beneficiary are all one and the same person. Thus, the grantor, as trustee, can simply transfer property out of the trust without going through anyone. However, if the grantor is not the trustee, the grantor has to instruct the trustee to transfer the property out of the trust. If the trustee refuses, the grantor can change the trustee. The beneficiary, if not the grantor, also cannot object to the transfer, because the designation of beneficiary in a revocabnle trust can be changed at any time. Thus, the beneficiary in a revocable trust does not have vested a interest in the property until such revocable trust becomes irrevocable. Usually, a revocable trust becomes irrevocable upon the death of the grantor.

On the other hand, irrevocable trusts have a more rigid structure, and once established, the grantor relinquishes control over the trust assets. The grantor cannot also usually change the designated beneficiaries. For this reason, the beneficiaries have a vested interest immediately upon execution of the irrevocable trust and the transfer of property into the trust. As a consequence, trust property cannot be taken out from an irrevocable trust without the unanimous consent of the beneficiaries. The trustee must also ensure that the removal of the property does not violate the trust's purpose or the grantor's original intentions. If the beneficiaries or trustee do not agree to the removal, court intervention may be required.

Impact of Removing Property from Trust

The income tax consequences of removing property from a trust vary based on the trust type and the characteristics of the property being removed. In the case of a revocable trust, removing property is usually not considered a taxable event because the settlor maintains ownership of the trust assets for income tax purposes. Furthermore, when the grantor passes away, properties held in a revocable trust benefit from a step-up in basis, which can minimize capital gains tax upon sale. Conversely, removing property from an irrevocable trust may be viewed as a sale or exchange, potentially leading to capital gains tax or other tax obligations for the trust or its beneficiaries. Moreover, properties in an irrevocable trust that are not included in the decedent's gross estate do not receive a step-up in basis; instead, they retain the grantor's tax basis when transferred into the trust. As a result, irrevocable trusts and their beneficiaries do not gain any advantage from a change in tax basis, unlike revocable trusts.

Whether or not you can take property from a trust depends on many factors. Should you have doubts, consulting with an estate planning attorney is crucial. Should you need assistance, we at the Law Offices of Albert Goodwin are here for you. You can call us at 212-233-1233 or send us an email at [email protected].