The term irrevocable trust refers to a type of trust where its terms cannot be modified, amended, or terminated without the permission of the grantor’s beneficiary or beneficiaries. 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.12 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.