What Happens to an Irrevocable Trust When the Grantor Dies?

It’s no secret that estate planning can be a confusing area of U.S. law. From choosing a will to tax planning, preparing for and understanding the probate process can be overwhelming for many Texas families.

While it can be easy to assume that trusts are only necessary for wealthy or influential people, this isn’t true. A trust is an invaluable mechanism when it comes to Texas estate planning. It’s important to understand the types of trusts available to make the best decisions for yourself, your estate, and your loved ones during the estate planning process.

What Is an Irrevocable Trust?

An irrevocable trust is a type of trust that cannot be changed, modified, or revoked without the permission of the beneficiary or beneficiaries. This takes effect as soon as the trust is established by the “grantor” or creator of the trust. In other words, once the grantor transfers assets into an irrevocable trust, they effectively give up any right of ownership to those assets and the trust itself.

How Irrevocable Trusts Work in Texas

An irrevocable trust functions by transferring assets from the grantor's estate into a new legal entity (the trust). The trust then becomes the legal owner of the assets. The grantor will then appoint a trustee, who will have the fiduciary duty to manage the trust assets in the best interest of the beneficiaries as outlined in the terms of the trust.

Role of Grantors, Trustees, & Beneficiaries in Texas Trusts

Executors and trustees play different roles in estate planning that rarely overlap. While an executor is typically appointed in a will to manage the decedent's estate after their death, a trustee manages assets placed in a trust for the beneficiaries.

Can an irrevocable trust be modified or revoked after the grantor passes away? Understanding the roles of the executor, trustee, and beneficiaries is vital in comprehending the post-death process. Consider this brief overview of the various roles involved in irrevocable trusts:

The Grantor

The grantor of an irrevocable trust, also called the trustor or settlor, is the person who creates the trust. They establish the terms of the trust, including who the beneficiaries are and what assets are included.

In irrevocable trusts, grantors transfer assets and relinquish all rights of ownership to those assets, meaning the grantor no longer has control over them and cannot make any changes or amendments to the terms of the trust without the permission of the beneficiaries.

After the grantor's death, the assets in the trust are managed or distributed by the trustee according to the terms set out by the grantor in the trust document.

The Trustee

In an irrevocable trust, the trustee plays a vital role in managing and administering the trust assets to benefit the beneficiaries. The trustee is a fiduciary, meaning they are legally obligated to act in the beneficiaries' best interests and uphold the trust's terms and intentions.

Generally, the trustee’s responsibilities include asset management, distributing trust assets appropriately, keeping detailed and accurate records of all accounts and transactions, ensuring compliance with applicable tax laws, making investment decisions to preserve and grow the trust’s assets, treating all beneficiaries fairly and impartially, and complying with all state and federal laws to avoid any conflicts of interest.

When the grantor of the irrevocable trust passes away, the role of the trustee becomes even more crucial. Following the grantor’s death, their legal obligations can expand to include additional steps, such as:

• Notifying beneficiaries of the grantor's death and their status as beneficiaries
• Gathering necessary documents, such as the grantor's death certificate and any probate documents
• Settling the grantor's outstanding debts and taxes before distributing assets to beneficiaries
• Ensuring that the trust assets are appropriately titled and transferred to the intended beneficiaries

It's critical for trustees to seek sound counsel from a Texas trust attorney if they’re uncertain about any aspect of their duties after the grantor's death. The proper administration of Texas trusts is essential to protect the interests of the beneficiaries and fulfill the grantor’s wishes after they pass away.

The Beneficiary

A beneficiary in an irrevocable trust is the person or entity set to receive the benefits or assets from the trust. These benefits can include income from the trust's assets, property, or other forms of wealth as outlined in the trust agreement. Generally, the role of “beneficiary” includes:

• Receiving distributions –The primary role of a beneficiary is to receive distributions from the trust as specified in the trust agreement. This may include regular income payments, specific assets, or lump-sum distribution.
• Having the right to information –Beneficiaries have the right to be informed about the trust and its administration. They can request information on the trust's assets, terms, and how the trustee is managing the trust.
• Enforcing the trust –If the trustee does not manage the trust properly or fails to make distributions as the trust document directs, beneficiaries have the right to take legal action to enforce the terms of the trust.

Irrevocable Trusts: What Happens When the Grantor Dies?

Upon the grantor's death, the trustee continues managing the irrevocable trust or distributes the assets according to the trust’s terms. Unlike a will, an irrevocable trust avoids probate, often expediting the asset distribution process and making it an appealing option for some families.

When the grantor of an irrevocable trust passes away, the following steps and procedures are generally followed:

• Notification of death. The executor or a designated representative is responsible for notifying the trustee and beneficiaries about the grantor's passing.
• Obtaining the death certificate. The trustee will require a certified copy of the grantor's death certificate to prove their passing.
• Trust administration. The trust document outlines the specific instructions for trust administration. The trustee will take charge of managing and distributing the trust assets according to the terms outlined in the trust agreement.
• Inventory of trust assets. The trustee will conduct an inventory of all assets held within the trust, including real estate, investments, bank accounts, and personal property.
• Valuation of assets. The trustee may find it necessary to obtain professional appraisals to determine the fair market value of certain assets, especially if the trust requires equal distributions to beneficiaries.
• Notifying creditors. The trustee should publish a notice to potential creditors, allowing them a specific period to make claims against the trust for any outstanding debts owed by the grantor.
• Settling taxes and debts. The trustee must settle any outstanding debts, including taxes owed by the grantor or the trust, before distributing assets to beneficiaries.
• Asset distribution. Once all debts and taxes are settled, the trustee will distribute the trust assets to the beneficiaries as per the terms outlined in the trust document.

Turn to a Trusted Texas Probate Attorney

Our experienced trust attorneys proudly provide wise and compassionate representation to Texas families in the Dallas-Fort Worth area. We understand how emotional and complicated estate planning can be, which is why our firm is committed to helping our DFW neighbors navigate the complexities of probate law.

At Crain & Wooley, our seasoned lawyers fight to give Texas families the closure, clarity, and healing they deserve. From trusts to estate planning to wills, our compassionate lawyers have the comprehensive knowledge to guide your legal steps with wisdom and integrity, empowering families to maintain their peace of mind no matter what life throws their way.

Contact us online to learn how our experienced firm can help preserve your hard-earned assets and ensure your estate is handled according to your wishes.

A 2019 study showed that only 18% of people age 55 and older have a complete estate plan that addresses both death and disability (meaning wills or trusts combined with up-to-date health and durable powers of attorney). If you haven’t done any planning yet, you should start now! But, what if you have a comprehensive plan in place already? Over time, life and law changes can occur that may cause your plan to be out-of-date. So, when should you make plan updates?

10. You Started a New Business

Small business owners spend time and energy on starting a business and making sure that it continues to operate and be profitable. However, many business owners fail to consider what would happen if they temporarily or permanently were unable to run their business (perhaps due to disability or death). Every business should have a succession plan in place.

9. Death of a Loved One

When someone who was part of your estate plan dies, you should consider how that affects your wishes and if, or how, that changes your goals at the time of your passing.

8. Law Changes

Laws change. For example, in 1997 $10,000 was the amount of the annual gift tax exclusion, in 2017 it was $14,000 and in 2021 the annual gift tax exclusion is $15,000. Laws change and as a result, your approach to planning should be reviewed taking into account those changes. You should consider working with someone who updates you on law changes. If you haven’t had a review considering law changes in more than five years – you should consider a check up on your estate plan.

7. You Moved to A New State

Every state has their own laws and their own rules for handling matters relating to death and disability. If you move to a new state, it is time to check on your plan to make sure that your wishes are still appropriately planned for in light of the new jurisdiction in which you reside.

6. Marriage

When new people come into your life, your goals and those that you are planning for need to be updated in your estate plan! Consider not only how your new spouse affects your goals and wishes, but how their family may affect your goals and wishes. If you are marrying again, you may need to consider separate children and blended family considerations. If someone in your estate plan is getting married, consider how that affects your goals – for example would you want to provide for the new spouse? If your children are the ones getting married, you should plan for how that new spouse affects your goals and wishes up to and including potentially planning to provide divorce protection for your children.

5. Birth

A new child in the family is exciting! It is also a time to update your plan to include the new addition to the family and address how your goals and wishes have changed. Up until the child turns 18 years old, you should consider who would be their guardian if their parents are disabled or have died. You should also consider whether 18 is the best age at which to pass assets or if planning for goals such as college/career school attendance or age appropriate distributions are better options.

4. Divorce

Divorce can be difficult and stressful. When the divorce is finalized, many people fail to consider the estate planning that was done while they were still married. It is likely that the people you planned for and the goals that you had have changed. Failing to update your estate plan after a divorce can cause headache and additional difficulty for those that survive you.

3. A Child Turns 18

Once a child turns 18 years old, they are legally an adult. While many of us don’t consider an 18-year-old an adult, the truth is parents are no longer legally allowed access to their child’s medical records, to make decisions on behalf of their child, or to direct their lives in a legal manner in any way. Consider having the 18-year-old sign power of attorney documents allowing parents to make decisions in their disability and think about whether or not provisions in an outdated estate plan still apply to the new adult in your life.

2. Health Changes

If your health or the health of anyone that is part of your estate plan has changed, it may be time to review your goals and wishes. For example, if a person becomes disabled, they may no longer be the best choice for an Executor or Trustee or they may need to receive gifts from you in a different amount or in a different way (such as in a Special Needs Trust).

1. Your Assets Change Significantly

Have you received an inheritance, started a new job, lost your job, did you win the lottery, etc.? If your assets and/or financial situation have changed significantly, it is a good time to review your estate plan to ensure that it still meets your needs and goal.

Have you experienced one of the top 10 reasons to update your plan? Contact us to take next steps.

If you have children that your spouse doesn’t know about, don’t assume that just because they were adopted by another family that they are no longer an heir of your estate.

TRUE STORY: In late 2020, a surviving spouse came to the office after her husband had died seeking advice on how to handle her deceased husband’s estate. Her husband died with no estate plan in place, and the surviving wife said they had no children together, and he had no children before they were married. The deceased husband had a house and some other assets that he owned as part of his 50% community property and the wife thought that she would have full ownership of the assets as the surviving spouse. To have her deceased husband’s name removed from the assets and her name listed as 100% owner, documents needed to be filed with the court to begin the probate process, which included a required process called a determination of heirship because there was no Last Will and Testament or Living Trust.

During the heirship investigation for this probate case, the court appointed attorney found out that years before the marriage to the surviving spouse that the husband had a son who was given up for adoption soon after birth. That changed everything.

Did you know that an adopted child inherits from their adoptive parents and their natural parents (read section 201.054 of the Texas Estates Code and 161.206 of the Texas Family Code)? The adopted child can inherit from their biological parents unless a court order states otherwise.

STORY CONCLUSION: So, what happened in our client’s case? After the surviving child and surviving spouse were formally recognized in the heirship proceedings, the court applied rules of law stating that in the instance where a person dies with no legal documents directing asset disbursement at death that the deceased spouse’s one-half interest in the community estate passes to the deceased spouse’s separate children. That means that the surviving spouse kept her half of the community property and the other half of the community property (the husband’s half) went to his son who had been given up for adoption. The surviving spouse in this case lost her deceased husband’s 50% interest in the community property to the previously unknown son of her deceased husband.

This is not a result that the deceased husband would have likely intended and certainly was not what the surviving spouse expected. Dying with no legal instructions (dying intestate) often has unexpected and unintended results. These situations can be avoided by intentionally planning and executing important estate documents such as a Last Will and Testament or a Living Trust.

To be blunt, you don’t know what you don’t know which is why working with a qualified estate planning attorney is of paramount importance. Make sure that this does not happen to you – contact us today, to speak with a professional.