What Happens to an Irrevocable Trust When the Grantor Dies

What happens when the grantor in an irrevocable trust dies? Nothing happens immediately unless the grantor is also the trustee of the irrevocable trust.

Back when an irrevocable trust was established, the grantor absolutely relinquished ownership and control over the trust assets. In most cases, in order for a trust to be considered irrevocable, the grantor cannot be the trustee of the trust. For this reason, the grantor’s death usually doesn’t affect the management of an irrevocable trust.

Consequently, the grantor’s creditors cannot go after the irrevocable trust’s assets since it is not considered the grantor’s property anymore. In order to pay income taxes, the trustee of the irrevocable trust will have to apply for its own employer identification number (EIN) with the Bureau of Internal Revenue, as opposed to a revocable trust where income is still reported under the grantor’s social security number. Thus, even when the grantor dies, the trustee of the irrevocable trust will continue to manage the trust in accordance with the provisions of the trust agreement.

For example, if you create an irrevocable trust for the benefit of your child, once you transfer the asset to the trust, you cannot take it back anymore. The trustee will manage the asset for the benefit of the child. Your death will not affect the management of the asset. The trust agreement will provide when the income of that asset is distributed, when the principal is distributed, and when the trust terminates.

There are some cases, however, where a grantor’s death triggers a major event in the irrevocable trust. For example, a Qualified Terminal Interest Property (QTIP) trust is usually funded upon the grantor’s death. The QTIP trust will name the grantor’s spouse as a lifetime income beneficiary and the grantor’s children as the remainder beneficiaries. As an irrevocable trust, the grantor’s surviving spouse will not be able to change the trust provisions anymore and will be limited to receiving the QTIP income with no right to dispose of the QTIP trust asset.

In an irrevocable life insurance trust (ILIT), the grantor’s death triggers the ILIT’s receipt of death benefits from the life insurance policy. In ILIT, the grantor transfers property to the ILIT during the grantor’s lifetime. The ILIT trustee uses the income of the ILIT property to pay life insurance premiums, ensuring the death of the grantor. When the grantor dies, the ILIT receives the death benefits, which it manages for the named beneficiaries. ILITs are usually used as part of an integrated estate plan to provide liquidity for the estate.

Similarly, in a charitable remainder unitrust, the death of a grantor (who is also named as a lifetime beneficiary) triggers the transfer of the remaining trust asset to the charitable beneficiary.

Sometimes, an irrevocable trust that was created can be affected by the timing of the grantor’s death. For example, in a grantor retained annuity trust (GRAT), property in the GRAT is not included in the grantor’s probate estate if the grantor did not die during the GRAT’s term. If the grantor, however, died during the GRAT term, the estate will retain the right to receive the annuity payments and this will be included in the grantor’s taxable estate under 26 USC §§ 2036 or 2039.

If the grantor is the trustee of the irrevocable trust, the named successor trustee will succeed the grantor in managing the trust and making distributions, in accordance with the trust agreement.

Ultimately, what happens to an irrevocable trust when the grantor dies depends on the type of trust and the terms of the trust agreement. A lawyer with expertise in trusts will be able to assist you in understanding and interpreting the trust’s provisions. A trusts lawyer will also be able to give you options on how to terminate or modify an irrevocable trust. Should you need assistance, we at the Law Offices of Albert Goodwin are here for you. We have offices in New York City, Brooklyn, NY and Queens, NY. You can call us at 212-233-1233 or send us an email at [email protected].