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LEGAL DICTIONARY

Irrevocable Trust

What Is an Irrevocable Trust?

An irrevocable trust is a legal arrangement that cannot be changed or terminated unless its beneficiaries agree to do so. This type of trust has certain advantages over a revocable trust, including reduced taxes and the ability to protect assets from creditors or other claims upon the grantor’s (the trust creator’s) death.

How Does an Irrevocable Trust Work?

A trust is a legal relationship that permits a third party (the trustee) to hold and manage assets on behalf of another party’s (the beneficiary) benefit. The grantor may set up a trust as either revocable or irrevocable.

With a revocable trust, the grantor keeps complete control of the trust assets. That means the grantor can change the beneficiaries or revoke the trust completely during their lifetime. On the other hand, with an irrevocable trust, the grantor relinquishes control of the trust assets. The grantor cannot revoke the trust, change its beneficiaries or modify it in any way.

There are two types of irrevocable trusts: one you create and activate during your lifetime (irrevocable living trust) and one that you make during your lifetime that activates after your death (irrevocable testamentary trust). With an irrevocable living trust, the trust assets are exempt from the probate process. Assets in an irrevocable testamentary trust must go through probate.

The FDIC sets regulations (12 C.F.R. § 330.13) for irrevocable trusts. The general rule is that a revocable trust becomes irrevocable upon the grantor’s death.

Why Would You Make a Trust Irrevocable?

Why would a grantor give up their control of a trust by making it irrevocable? There are three main advantages of an irrevocable living trust over a revocable living trust.

  1. Creating a tax shelter. Some irrevocable trusts are designed to avoid or reduce federal and state estate taxes. If you create an irrevocable trust for your beneficiaries, the trust is exempt from estate taxes – regardless of whether or not it exceeds the tax-free gift limit.

  2. Protecting assets from creditors. Some professionals, such as doctors and attorneys, are more prone to lawsuits than others. Court orders and judgments cannot access the assets from an irrevocable trust. Additionally, lenders cannot gain the assets placed in an irrevocable trust.

  3. Meeting income requirements for government benefits. An irrevocable trust can allow the grantor to maintain eligibility for Social Security income and Medicaid benefits for themselves or a disabled dependent.

Start your Revocable Living Trust now

What Is an Example of an Irrevocable Trust?

An irrevocable life insurance trust (ILIT) is an example of an irrevocable trust someone might create as part of their estate plan. This trust would own and control the grantor’s life insurance policy or policies. It could also manage and distribute the proceeds after the grantor’s death.

An advantage of this type of irrevocable trust is that it offers protection from estate taxes. Like all irrevocable trusts, however, the grantor cannot revoke or change this trust after it has been established.

Helpful Resources:

FDIC - Irrevocable Trust Accounts

FDIC - Law, Regulations, Related Acts

Cornell Law - Irrevocable Trust

Kiplinger - The (Only) 3 Reasons You Should Have an Irrevocable Trust

Investopedia - Irrevocable Trusts Explained

What Is an Irrevocable Trust?

An irrevocable trust is a legal arrangement that cannot be changed or terminated unless its beneficiaries agree to do so. This type of trust has certain advantages over a revocable trust, including reduced taxes and the ability to protect assets from creditors or other claims upon the grantor’s (the trust creator’s) death.

How Does an Irrevocable Trust Work?

A trust is a legal relationship that permits a third party (the trustee) to hold and manage assets on behalf of another party’s (the beneficiary) benefit. The grantor may set up a trust as either revocable or irrevocable.

With a revocable trust, the grantor keeps complete control of the trust assets. That means the grantor can change the beneficiaries or revoke the trust completely during their lifetime. On the other hand, with an irrevocable trust, the grantor relinquishes control of the trust assets. The grantor cannot revoke the trust, change its beneficiaries or modify it in any way.

There are two types of irrevocable trusts: one you create and activate during your lifetime (irrevocable living trust) and one that you make during your lifetime that activates after your death (irrevocable testamentary trust). With an irrevocable living trust, the trust assets are exempt from the probate process. Assets in an irrevocable testamentary trust must go through probate.

The FDIC sets regulations (12 C.F.R. § 330.13) for irrevocable trusts. The general rule is that a revocable trust becomes irrevocable upon the grantor’s death.

Why Would You Make a Trust Irrevocable?

Why would a grantor give up their control of a trust by making it irrevocable? There are three main advantages of an irrevocable living trust over a revocable living trust.

  1. Creating a tax shelter. Some irrevocable trusts are designed to avoid or reduce federal and state estate taxes. If you create an irrevocable trust for your beneficiaries, the trust is exempt from estate taxes – regardless of whether or not it exceeds the tax-free gift limit.

  2. Protecting assets from creditors. Some professionals, such as doctors and attorneys, are more prone to lawsuits than others. Court orders and judgments cannot access the assets from an irrevocable trust. Additionally, lenders cannot gain the assets placed in an irrevocable trust.

  3. Meeting income requirements for government benefits. An irrevocable trust can allow the grantor to maintain eligibility for Social Security income and Medicaid benefits for themselves or a disabled dependent.

Start your Revocable Living Trust now

What Is an Example of an Irrevocable Trust?

An irrevocable life insurance trust (ILIT) is an example of an irrevocable trust someone might create as part of their estate plan. This trust would own and control the grantor’s life insurance policy or policies. It could also manage and distribute the proceeds after the grantor’s death.

An advantage of this type of irrevocable trust is that it offers protection from estate taxes. Like all irrevocable trusts, however, the grantor cannot revoke or change this trust after it has been established.

Helpful Resources:

FDIC - Irrevocable Trust Accounts

FDIC - Law, Regulations, Related Acts

Cornell Law - Irrevocable Trust

Kiplinger - The (Only) 3 Reasons You Should Have an Irrevocable Trust

Investopedia - Irrevocable Trusts Explained