Paralegal Advanced Competency Exam (PACE) Practice Exam

What is an irrevocable trust?

1. A trust that allows the Settlor to retain control of the trust property

2. A trust created by the Settlor that cannot be altered after its creation

3. A trust administered by the Settlor themselves

4. A trust that requires the Settlor to be involved in its management

The correct answer is: A trust created by the Settlor that cannot be altered after its creation

An irrevocable trust is defined as a trust created by the Settlor that cannot be altered after its creation. This type of trust, once established, effectively removes the Settlor's control over the assets placed into it, which means that the terms of the trust cannot be modified, revoked, or terminated by the Settlor. This aspect of irrevocable trusts is significant for several reasons, including asset protection and tax implications. Because the Settlor relinquishes control and ownership of the assets, those assets are typically not considered part of the Settlor's estate for tax purposes, which can be advantageous in estate planning. In contrast, other types of trusts allow for various degrees of control and management by the Settlor, making them revocable or flexible in nature. For instance, a trust that allows the Settlor to retain control of the trust property contradicts the core nature of an irrevocable trust. Similarly, a trust administered by the Settlor or one that requires the Settlor to be involved in its management would also imply a level of control that an irrevocable trust negates. Such characteristics are crucial when determining the function and benefits of different trust types in estate planning strategies.