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An irrevocable trust is a legal arrangement where the creator (settlor) of the trust transfers assets to another person or entity (trustee), while retaining the right to receive income generated by the trust and/or take possession of the trust property at a later date. If you are considering setting up an irrevocable trust, here’s a recent case that might help you understand the complexities around an irrevocable trust.

The Legal Case

In In re Bumstead Family Irrevocable Trust, No. 13-20-00350-CV (Tex. App. Aug. 10, 2020), on appeal from Probate Court No. 1 of Harris County, Texas, the beneficiaries of a trust sued the trustee, claiming that he had mismanaged it and sought an accounting. A judge ordered several steps to assure that the funds would be properly managed until the matter was settled.

The court noted cases from other appeals courts stating that an order suspending a trustee’s powers was not appealable. The court distinguished its own case, however, because the power suspension was accompanied by a highly appealing order appointing a receiver.

The court noted that several courts held that orders requiring an accounting were not subject to interlocutory appeal. However, because the accounting order was contained in an injunction order, the court held that it was also appealable. The court held that it had jurisdiction.

The appellants contended that the trial court’s order disrupted the status quo insofar as it ordered the trustee to transfer property to the receiver for distribution and directed the receiver to take control of trust assets and affairs and distribute trust assets upon application to the trial court. The Court of Appeals agreed in part with this complaint. The appellate court disagreed with the appellants’ argument.

The Court noted that parties are not entitled to jury trials for temporary injunctive relief and that the appellants had notice of the hearing and an opportunity to present evidence. The appellants argued that the trial court’s findings were insufficient to support its conclusion that the trustee breached various duties. The court found that the trustee’s actions constituted a breach of the duty of loyalty, duty to disclose, and duty to not commingle assets.

The court found that the plaintiff had sufficiently demonstrated that she was likely to suffer irreparable harm if the defendant was not enjoined from selling the property, and that the property was unique and irreplaceable. The court held that the evidence showed that the assets at issue included, but were not limited to several different tracts of real property. The evidence showed that the real estate was unique and there was concern that the trustee would develop the property without authority during litigation.

The court found that the trustee was not required to prepare an accounting when he had no access to relevant information, and that the appellants waived this issue by failing to raise it in the trial court. On appeal, the appellants alleged that the trial court’s order requiring him to provide accountings encompassed records he has no access to and allegedly required use of estate funds to which he has no access. In any event, the court addressed the argument and disagreed. 

The court of appeals affirmed the trial court’s orders in all respects except that it reversed and remanded the issue regarding distributing trust assets. 

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How does an irrevocable trust work?

An irrevocable trust is a trust that cannot be altered, amended or revoked by the person who creates it. Trusts are legal entities that are subject to laws and regulations. The creator of an irrevocable trust must place assets (e.g., money and property) into the trust for a specific purpose. Irrevocable trusts are used when an individual wants to avoid making future decisions about their estate.

Is an irrevocable trust a good idea?

An irrevocable trust provides a way to manage assets of an estate during the lifetime of an individual and in some cases, after their death. An irrevocable trust is created by a grantor with the help of a trustee. This document allows the grantor to keep control over how their money is managed, even after they die. The primary benefit of a living trust is that it allows you to manage your property while you are alive and avoid the difficulties inherent in transferring assets at your death. You can avoid probate, the court-supervised administration of your estate after your death. A living trust also allows you to name successor trustees and beneficiaries, giving them clear instructions about what should be done with your assets after you die.

Who owns the assets in an irrevocable trust?

An irrevocable trust is a trust that cannot be changed or terminated by the grantor. With an irrevocable trust, the grantor gives assets to a trustee to manage for the benefit of a beneficiary or beneficiaries. The trust assets are held in a separate legal entity from the grantor. The trustee is the legal owner of the trust assets, and he or she is responsible for managing those assets for the benefit of one or more beneficiaries. In an irrevocable trust, the grantor is not considered to own the assets in the trust. The beneficiary or beneficiaries are considered to own the assets instead.

Why would someone want an irrevocable trust?

An irrevocable trust is a way to manage your assets after you pass away. With an irrevocable trust, you can name a trust protector who will control how the assets in your trust are managed. You don’t need to worry about your children or grandchildren being able to access the money whenever they want. This is particularly valuable if you have young children or grandchildren that you want to provide for financially, but you don’t want them to spend all of their inheritance at once.

What happens to an irrevocable trust when the grantor dies?

An irrevocable trust is a trust that cannot be changed or revoked once it has been established. Once the grantor, also known as the settlor, dies, this type of trust does not go away. The assets in an irrevocable trust pass directly to the beneficiaries designated by the grantor.

What is revocable trust?

A revocable trust is a way for you to transfer your assets to another party without having to probate a will. It’s a powerful tool designed for convenience and flexibility. However, there’s one big drawback: If you amend your revocable trust after making a transfer, the gift to the new charity is not considered part of your estate. This can be great for reducing the size of your estate, but it may not save you as much in federal estate tax as you might expect.

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