Irrevocable Trusts Explained: How They Work, Types, and Uses

What Is an Irrevocable Trust?

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.

How an Irrevocable Trust Works

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.

Types of Irrevocable Trusts

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:

  • Irrevocable life insurance trust
  • Grantor-retained annuity trust (GRAT), spousal lifetime access trust (SLAT), and qualified personal residence trust (QPRT) (all types of lifetime gifting trusts)
  • Charitable remainder trust and charitable lead trust (both forms of charitable trusts)

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.

Irrevocable Trust Uses

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.

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Irrevocable trusts can have many applications in planning for the preservation and distribution of an estate, including:

  • To take advantage of the estate tax exemption and remove taxable assets from the estate. Property transferred to an irrevocable living trust does not count toward the gross value of an estate. Such trusts can be especially helpful in reducing the tax liability of very large estates.
  • To prevent beneficiaries from misusing assets, the grantor can set conditions for distribution.
  • To gift assets to the estate while still retaining the income from the assets.
  • To remove appreciable assets from the estate while still providing beneficiaries with a step-up basis in valuing the assets for tax purposes.
  • To gift a principal residence to children under more favorable tax rules.
  • To house a life insurance policy that would effectively remove the death proceeds from the estate.
  • To deplete one’s property to ensure eligibility for government benefits, such as Social Security income and Medicaid (for nursing home care). Such trusts can also be used to help secure benefits and care for a special needs child by preventing disqualification of eligibility.

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.

Irrevocable Trusts vs. Revocable Trusts

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.

SECURE Act Rules

The Setting Every Community Up for Retirement Enhancement (SECURE) Act changes some of the tax-saving benefits of see-through trusts.

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.

— Update: 10-02-2023 — found an additional article What You Need to Know about a Revocable vs Irrevocable Trust in Estate Planning from the website for the keyword benefits of irrevocable trust.

When it comes to Estate Planning, getting your affairs in order and planning for the future (both yours your loved ones’) is one of the single most important and responsible things you can do. There are many aspects to a comprehensive Estate Plan, and while the process may seem a bit daunting at first, believe us when we tell you, it’s worth the effort in the long run. 

We’re here to help you understand more about the various types of Living Trusts that are available for you to include in your Estate Plan. It’s important to truly know the difference between Revocable and Irrevocable Trusts, as they could have a significant impact on your legacy. Each has its own benefits, and which is the “better” choice will depend on your current situation and your future goals. 

Keep reading to learn:

  • The benefits of a Revocable Trust

  • The benefits of an Irrevocable Trust

  • Which option is right for you

What is a Revocable Trust?

A Revocable Trust is a Trust that can be , meaning it can be changed or updated at any given time as long as you’re still living and of sound mind. Also known as a Revocable Trust, this can be a good option if you want to establish a Trust, yet still maintain control over your estate and assets while you’re alive. Keep in mind that once you fund a Trust, the Trust becomes the owner, not you. Upon death, a Revocable Trust automatically becomes Irrevocable and cannot be changed.  

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Benefits of a Revocable Trust

Revocable Trusts are unique for several reasons. 

  • Flexibility: They are flexible when and if you want to ever amend them. Revocable Trusts are typically easier to amend than a Will.

  • Avoids probate: Save your loved ones time, money and most of all, stress when you create a Revocable Trust by avoiding the process of probate.

  • Originals not needed: Whereas an Will must be present to be validated during the probate process, since Revocable Trusts don’t go through probate, an original is not required, which can greatly simplify things upon your passing.   

  • Continuous management: Even if you become incapacitated, as long as the Revocable Trust was funded, assets within it will continue to be managed without interruption. 

One more important benefit of Revocable Trusts is they ensure property and assets remain readily available for you even if you become incapacitated. It’s true that you could just have a Durable Power of Attorney (POA) in place, but POAs are often more difficult for third parties to deal with.  

Disadvantages of a Revocable Trust

While there are many advantages to a Revocable Trust, there are also some downsides, too. Some of the potential disadvantages to Revocable Trusts could include: 

  • No tax advantage: Revocable Trusts don’t save you money on your income taxes or estate taxes. 

  • No asset protection: While you’re living, a Revocable Trust doesn’t protect your assets from creditors.  

  • Need for updates: While Wills can automatically update or change after major life events just as birth of a child or divorce, a Revocable Trust need to be consciously updated. 

  • Administrative work: Retitling assets to be Trust-owned can be time consuming, but necessary to fund a Trust. Not all assets will need to be retitled, though.  

What is an Irrevocable Trust?

On the contrary, an Irrevocable Trust is one that cannot be easily amended, changed or terminated once it’s signed. There are only a few, very specific, very isolated instances that would allow for an Irrevocable Trust to be modified. And in most cases, changes must be approved through the permission and consent of all named Beneficiaries. 

Benefits of an Irrevocable Trust

The stringency of an Irrevocable Trust begs the question: how could it possibly be a good idea to get this type of Trust? But believe it or not, there are some distinct benefits to an Irrevocable Trust.

  • Estate tax benefit: Items and assets you put into an Irrevocable Trust do not add to the value of an estate. That means creating an Irrevocable Trust could be a financially smart move for anyone with a very large estate. In 2022, estates valued at more than $12.06 million are subject to federal tax (note: the tax is applied only to any amount over that threshold). This value is projected to raise to $12.92 million in 2023.

  • Asset protection: An Irrevocable Trust can protect assets from judgements and creditors. If you have a high-profile career or are otherwise likely subject to lawsuits, an Irrevocable Trust may be a good idea. 

  • Access to government benefits: Your wealth can actually count against you when it comes time to collect government benefits like Medicare and Supplemental Security income. By putting assets into an Irrevocable Trust, you may not have to deplete your savings and assets before qualifying for assistance. This can be huge in preserving wealth for your heirs. 

Disadvantages of an Irrevocable Trust

There are some obvious downsides to an Irrevocable Trust. The main one is the fact that you can’t change an Irrevocable Trust once it’s finalized. Other disadvantages may be: 

  • Higher tax rates: Any income tax that an Irrevocable Trust earns will be taxed separately, and often at a higher rate. 

  • Additional tax return: An Irrevocable Trust will need to file a tax return, and there will often be a cost to prepare and file.

  • Complex language and terms: Irrevocable Trusts usually have difficult Trust terms that may be hard to understand.  

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How to Determine which Type of Trust is Right For You

Most people create a Trust for a very specific reason. They want to protect their estate and make their wishes for the future clearly known. Knowing which is best, a Revocable Trust vs an Irrevocable Trust, really just depends on what level of protection you need. 

If you want to remain in control of your estate, then for obvious reasons, a Revocable Trust may be the way to go. The ability to change and modify your Trust in the future is a huge benefit for many people. But it’s not always the best route.  

If you have a very large estate or if you’re concerned about estate taxes or potential liens or judgements against you, you might be thinking about an Irrevocable Trust. An Irrevocable Trust means you can protect yourself, your loved ones and your estate against future legal action. It also means you can protect the financial future of your estate by avoiding substantial estate taxes. 

Trusts & Tax Avoidance

Some Trusts can be used for tax benefits. This is an important aspect to understand, because not all Trusts are created equally when it comes to the IRS and taxes. Some types of Trusts are better than others if the goal is to be tax beneficial. 

Irrevocable Trusts & Estate Tax Avoidance

While Revocable Trusts do save you when it comes to income taxes or estate taxes, Irrevocable Trusts actually can help you. An Irrevocable Trust can be a tax-advantageous strategy that your loved ones can benefit from after you’ve passed away. By putting your assets and property into the Irrevocable Trust, those items can’t be taxed after your death. In this sense, an Irrevocable Trust can actually help to the value of an estate. 

Avoiding Capital Gains Taxes

Another potential benefit to an Irrevocable Trust is you can use it to avoid personal capital gains based on the value of the estate. From a tax perspective, the Trust is its own entity with its own Tax ID number. An Irrevocable Trust may be used to reduce personal income and capital gains taxes by shifting those to the Trust and away from you. However, taxes on an Irrevocable Trusts can be complex and could even be higher than your personal tax rate.

Other Common Types of Trusts

There are many other types of trusts in addition to the two we’ve discussed here. Each has its own nuances, benefits and disadvantages, so it’s important to thoroughly understand them before deciding which is best for your needs.

  • A-B Trust: Irrevocable Joint Trusts made by spouses that will divide into two Trusts once the first spouse passes. Often used to minimize estate taxes. 

  • Testamentary Trust: A Trust made within a Will, where the Will instructs how the Trust should be established after you pass. 

  • Life Insurance Trust: An Irrevocable Trust that will hold life insurance proceeds after you pass. Can be used to bring down the value of an estate as a means to reduce taxes.

  • Charitable Trust: Trusts that donate some or all of your estate to the charity you identify. Can be structured to pay the charity first and then the balance to your loved ones, or the other way around. 

Nobody wants to face the tough decisions that come along with Estate Planning, but doing so now means things will be a lot easier on those you love when the time comes. Getting a trust-based Estate Plan is the only way you can ensure your affairs are in order and that your wishes will be not only known, they’ll be honored.  Reach out to Trust & Will today to learn more about how you can create a comprehensive, complete, concrete Trust as part of your Estate Plan. It’s the beginning of the legacy you’ll one day leave behind.


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About the Author: Tung Chi