:max_bytes(150000):strip_icc()/TermDefinitions_Irrevocabletrust-4dab1d345f7d4d938fdb38a44ec3ea61.jpg)
Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.
Updated August 31, 2024 Reviewed by Reviewed by Khadija KhartitKhadija Khartit is a strategy, investment, and funding expert, and an educator of fintech and strategic finance in top universities. She has been an investor, entrepreneur, and advisor for more than 25 years. She is a FINRA Series 7, 63, and 66 license holder.
Fact checked by Fact checked by Vikki VelasquezVikki Velasquez is a researcher and writer who has managed, coordinated, and directed various community and nonprofit organizations. She has conducted in-depth research on social and economic issues and has also revised and edited educational materials for the Greater Richmond area.
The purpose of an irrevocable trust is to move the assets from the grantor's control and name to that of the beneficiary. This reduces the value of the grantor's estate in regard to estate taxes and protects the assets from creditors.
Irrevocable trusts cannot be modified, amended, or terminated without the permission of the grantor's beneficiary or by the order of a court. The exact rules can vary by state. The grantor, having effectively transferred all ownership of assets into the trust, legally removes all of their rights of ownership to the assets and the trust.
Irrevocable trusts are generally set up to minimize estate taxes, access government benefits, and protect assets. This is in contrast to a revocable trust, which allows the grantor to modify the trust, but loses certain benefits such as creditor protection.
Irrevocable trusts are primarily set up for estate and tax considerations. That's because it removes all incidents of ownership, removing the trust's assets from the grantor's taxable estate. It also relieves the grantor of the tax liability on the income generated by the assets. While the tax rules vary between jurisdictions, the grantor can't receive these benefits if they are the trustee. The assets held in the trust can include (but are not limited to) a business, investment assets, cash, and life insurance policies.
Trusts have an important place in estate and legacy planning. But there is a downside: the cost. Setting up any type of trust can be complicated enough that an attorney is necessary. And this means that people may end up spending a few thousand dollars or more in attorney fees to set them up.
Irrevocable trusts are especially useful to individuals who work in professions that may make them vulnerable to lawsuits, such as doctors or attorneys. Once an asset is transferred to such a trust, it is owned by the trust for the benefit of its beneficiaries. Therefore, it is safe from legal judgments and creditors since the trust will not be a party to any lawsuit.
Today’s irrevocable trusts come with many provisions that were not commonly found in older versions of these instruments. These additions allow for much greater flexibility in trust management and distribution of assets. Provisions such as decanting, which allows a trust to be moved into a newer trust with more modern or advantageous provisions, can ensure that the trust assets will be managed effectively. Other features that allow the trust to change its state of domicile can provide additional tax savings or other benefits.
Although they are commonly associated with the very wealthy, trusts are an important piece of estate planning for anyone—regardless of income status.
Irrevocable trusts come in two forms: living trusts and testamentary trusts.
A living trust, which is also known as an inter vivos (Latin for "between the living") trust, is originated and funded by an individual during their lifetime. Some living trust examples are:
Testamentary trusts, on the other hand, are irrevocable by design. That's because they are created after the death of their creator and are funded from the deceased's estate according to the terms of their will. The sole way to make changes to a testamentary trust (or cancel it) is to alter the will of the trust's creator before they die.
An irrevocable trust has a grantor, a trustee, and a beneficiary or beneficiaries. Once the grantor places an asset in an irrevocable trust, it is a gift to the trust and the grantor cannot revoke it. The grantor can dictate the terms, rules, and uses of the trust assets with the consent of the trustee and the beneficiary.
Irrevocable trusts can have many applications in planning for the preservation and distribution of an estate, including:
An irrevocable trust is a more complex legal arrangement than a revocable trust. Because there could be current income tax and future estate tax implications when using an irrevocable trust, seek a tax or estate attorney's guidance.
Revocable trusts may be amended or canceled at any time as long as their creator is mentally competent. They do offer the benefit of allowing their creator to cancel them and reclaim property held by the trust at any time before death. However, such trusts do not offer the same protection against legal action or estate taxes as irrevocable trusts.
When using revocable trusts, government entities will consider that any property held in one still belongs to the trust's creator and therefore may be included in their estate for tax purposes or when qualifying for government benefits. Once a revocable trust's creator dies, the trust becomes irrevocable.
Previously, certain non-spousal beneficiaries of retirement accounts that had been placed in an irrevocable trust could take their distributions over their life expectancy. However, under the SECURE Act rules, some beneficiaries may find they must take a full distribution by the end of the tenth calendar year following the year of the grantor's death.
Again, because the tax implications of this can be challenging and can change with the passage of new laws, it's important to consult a tax or estate attorney's guidance when using an irrevocable trust.
An irrevocable trust cannot be changed or modified without the beneficiary's permission. Essentially, an irrevocable trust removes certain assets from a grantor’s taxable estate, and these incidents of ownership are transferred to a trust. A grantor may choose this structure to relieve assets in the trust from tax liabilities, along with other financial benefits.
First, irrevocable trusts cannot be changed or altered. Among the primary reasons they are used is for tax reasons, where the assets in the trust are not taxed on income generated in the trust, along with taxes in the event of the benefactor's death. Revocable trusts, on the other hand, can change. Beneficiaries may be removed and stipulations may be modified, along with other terms and management of the trust. However, when the owner of the trust dies, the assets held in the trust realize state and federal estate taxes.
Under an irrevocable trust, legal ownership of the trust is held by a trustee. At the same time, the grantor gives up certain rights to the trust. Once an irrevocable trust is established, the grantor cannot control or change the assets once they have been transferred into the trust without the beneficiary's permission. These assets can include a business, property, financial assets, or a life insurance policy.
Irrevocable trusts can be very useful in estate planning to minimize estate taxes and protect assets. There are two different types: living trusts, created and funded by an individual during their lifetime, and testamentary trusts, which are created after the death of their creator according to the terms of their will. Irrevocable trusts are more complex arrangements than revocable trusts and may have current and future tax implications, so it's best to consult a tax or estate attorney if you're contemplating setting one up.
