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An irrevocable trust is a trust that allows for certain protections for the creator of the trust. In exchange for these benefits the creator of the trust forfeits any access to or control over these assets.

What Is an Irrevocable Trust?

An irrevocable trust is a trust where the terms generally cannot be modified or changed once it is finalized, at least not without the permission of the beneficiary or beneficiaries of the trust. The grantor of the trust legally transfers their ownership of the assets used to fund the trust and relinquishes any ownership rights to those assets.

Irrevocable trusts are generally used in conjunction with estate planning. Placing assets in an irrevocable trust will get these assets out of the grantor’s estate and they will not be subject to any estate taxes that the estate may incur.

Irrevocable trusts can also be used to shield assets from a potential lawsuit or other legal action. Professionals such as doctors and others who might be subject to legal action often use these trust to shield the assets they wish to pass on to their heirs. Types of assets that can be used to fund the trust include life insurance policies, real estate, securities or cash and an interest in a business.

The three key players in a trust are:

  • The grantor. This is the person who establishes the trust and who funds it with the assets that are intended for the trust’s beneficiaries.
  • The beneficiaries are those who will benefit from the trust when the transfer of the assets within the trust are triggered by an event such as the passage of a certain amount of time or the death of the grantor.
  • The trustee is the person or organization in charge of administering the trust under the terms of the trust agreement.

Types of Irrevocable Trusts

There are two main types of irrevocable trusts.

Living Trusts

A living irrevocable trust is formed and funded by the grantor during their lifetime. Some examples of a living irrevocable trust include:

  • Irrevocable life insurance trusts (ILIT) contain one or more life insurance policies as the funding mechanism. The trust actually becomes the owner of the life insurance policies. The ILIT distributes the death benefit to the heirs free of any estate taxes. If the beneficiaries were to die before the insured person, the death benefit could end up back in that person’s estate where it could be subject to estate taxes if the estate was large enough.
  • A Grantor Annuity Trust (GRAT) allows the grantor to contribute assets to the trust and receive an annuity payment for a time. After that period, the assets revert to the trust beneficiaries tax-free.
  • Charitable remainder and charitable lead trusts are both types of irrevocable trusts in which a charity is the ultimate beneficiary. Under a charitable remainder trust, the grantor receives payments over their lifetime, with the amount left in the trust reverting to the charitable beneficiary upon their death. With a charitable lead trust, payments are made to the charity for a period of time, then the rest goes to the beneficiary of the trust.
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Testamentary Trusts

A testamentary irrevocable trust is one that is created after the death of the creator of the trust. The trust is funded with proceeds from the estate of the trust’s creator. The only way any changes can be made to the terms of the trust is to alter the trust creator’s will before they die.

Revocable vs. Irrevocable Trusts

The other main type of trust that is often used is a revocable trust. They can also be used in estate planning and as a way to title assets in some cases.

The main differences between the two types of trusts are:

  • The owner of a revocable living trust can change the terms of the trust at any time, the creator of an irrevocable trust cannot.
  • Irrevocable trusts offer tax shelter benefits for the assets used to fund the trust this is not the case with a revocable living trust.
  • Irrevocable trusts offer a level of creditor protection, revocable trusts do not.
  • The creator of a revocable trust can change the trust beneficiaries as they see fit, this is not the case with an irrevocable trust.
  • The creator of a revocable trust can remove assets from the trust, this is not the case with an irrevocable trust.

Benefits of Irrevocable Trusts

There are several benefits to using an irrevocable trust.

  • Legal protection from creditors, as mentioned above. Depending upon the laws in your state, transferring assets to an irrevocable trust can potentially shield these assets from creditors under a number of scenarios including bankruptcy of the grantor. Depending upon the local laws, creditors may also be prevented from any sort of claw back of the assets.
  • Estate planning benefits. With the increase in the amount of assets that can be exempted from the estate tax, this isn’t as prevalent a need as prior to the tax reforms enacted in late 2017. For those with assets potentially above these thresholds, the assets used to fund the irrevocable trust are exempt for their estate and won’t be subject to estate taxes.
  • Qualifying for Medicaid and other benefits. Medicaid benefits are in part based upon an applicant’s assets. An irrevocable trust can be a way to move these assets out of someone's control to both help them qualify for the benefit and to be able to pass the assets on to their desired heirs instead of spending them on care needs.
  • A special needs trust is one in which the assets are designated for the care of a disabled beneficiary. These trusts can also be used to help these beneficiaries meet the income restrictions for aid such as Social Security disability and other forms of aid. These can be very complicated vehicles and it is wise to engage the services of an attorney who is well-versed in this area.

There are other types of irrevocable trusts that may be appropriate for your situation. It’s always a good idea to consult with a financial professional and/or an attorney knowledgeable in estate planning and asset protection to see if an irrevocable trust is the right solution for you.