Irrevocable trust

A trust is a way of separating three things that are normally bundled together in ownership: who holds legal title, who decides how the property is used, and who benefits from it.

The settlor creates the trust and hands the property over. The trustees hold legal title and exercise control in the interest of the beneficiaries. The trust deed defines the purpose, the beneficiaries, the property and the powers of the trustees. Trustees can be the settlor, the beneficiaries, or anyone else the settlor can rely on to give effect to the purpose.

What makes a trust irrevocable is that the settlor cannot unwind it. That sounds like a loss of flexibility, and it is — it is also the entire source of its protective value. The workbook states the consequence in one sentence: an irrevocable trust is protected from the bankruptcy of the settlor, and is therefore a structure that can be used to protect the interests of dependents.

This page covers the trust mechanism only. For the wider exercise of ordering an estate — the inventory, the beneficiaries, the will, the executors and guardians — see estate planning.

The transfer is the whole thing. The workbook is explicit: the ownership of the property has to be transferred to the trust when the trust is created. A deed that names property the settlor still owns has not created a trust over it. The property may be movable or immovable.

Where it sits among the estate planning tools the workbook lists:

The trust is the only one of these that works while the settlor is alive, continues after death, and is insulated from the settlor's creditors. The workbook also lists trusts among the estate-planning activities as a way to create tax-efficient structures to manage the estate and make periodic payouts to beneficiaries — which matters where a beneficiary cannot manage money directly.

A 58-year-old business owner has a son with a permanent disability who will never manage his own finances. His net worth is Rs 2.2 crore. On advice he settles Rs 90 lakh into an irrevocable trust for the son, with his sister and a professional trustee as trustees, and retains Rs 1.3 crore in his own name.

Three years later the business fails. Admitted claims: Rs 1.6 crore.

Rs 30 lakh more for the dependent, and it is available now rather than after the estate is administered. The trustees can make periodic payouts to the son for life without his ever handling the capital — which a lump-sum bequest under a will cannot do.

What he gave up is exactly as real: the Rs 90 lakh is gone. He cannot reclaim it if he needs it, cannot change his mind about the beneficiary, and cannot borrow against it. A revocable trust would have left him all of those options and none of the protection.

Chapter 8 (Special Considerations in Retirement), section 8.1.6 (Estate Planning), lists trusts among the tools alongside wills, nomination, gifts, joint holding and power of attorney, and singles out the irrevocable trust for bankruptcy protection. The examinable work in this section is discrimination between the tools: which takes effect only on death, which is a payment mechanism rather than a transfer of title, which survives the settlor's insolvency. Expect a question on who holds legal title in a trust — the trustee — and on what the trust deed must define.

• Irrevocable is not the same as unbreakable by the settlor's wishes; it is unbreakable by the settlor. The protection follows from the settlor genuinely giving the property away.
• Ownership must actually be transferred when the trust is created. A deed alone, over property still held in the settlor's name, does not create the protection.
• The trustee holds legal title; the beneficiary holds the benefit. These are different people with different rights, and the question usually asks about title.
• Do not confuse a trust with a nomination. The workbook is explicit that a nominee receives money in the capacity of a trustee for the legal heirs and that a valid will supersedes a nomination. That figurative "trustee" is not a trust.
• A gift is not an irrevocable trust either. The workbook notes a gift is usually an irrevocable transfer but can be revoked if the donee agrees — and a gift transfers to the donee outright, with no trustee and no ongoing structure.
• Trusts are an estate-planning tool, not a retirement-income product. They sit in Chapter 8 with wills and POAs, not in the product chapters.