What Is an Irrevocable Trust?
An irrevocable trust is an estate-planning tool that transfers ownership of assets to beneficiaries. Irrevocable trusts can rarely be amended, changed or terminated once created. These trusts help avoid probate and estate tax but are less common than revocable trusts.
How Do Irrevocable Trusts Work?
An irrevocable trust is a way to transfer assets to beneficiaries after you die. It is less flexible than its revocable counterpart and can only be altered under rare circumstances.
Assets inside a trust avoid probate, or the public court process of validating a will and passing assets to heirs. They also remain private, because the contents of a trust are not public record.
Trusts can stipulate specific requirements for dispersing assets to beneficiaries. These estate-planning tools can hold assets for weeks, months or even years after your death. Or, you might bar beneficiaries from receiving funds until they reach a certain age.
A trust is a complex legal document. An attorney is usually required to create one, and it can cost between $1,000 and $3,000 to establish.
Once created, you must transfer the ownership of property and assets from your name into the name of the irrevocable trust. This is known as funding the trust.
This process relinquishes your control over assets. The irrevocable trust is now the official owner.
Tax advantages are the primary benefit of irrevocable trusts. This unique feature makes them ideal for people with large estates and wealth management needs who want to avoid estate and capital gains tax.
Irrevocable trusts aren’t for everyone. Their rigid rules and restrictions make it nearly impossible to access money or property if you run into unexpected financial hardship or change your mind about a beneficiary.
Revocable vs. Irrevocable Trust
All trusts fall into two main categories: Revocable and irrevocable.
Revocable trusts give you more control when you’re alive. They are also more common than irrevocable trusts.
Assets transferred to an irrevocable trust do not contribute to the value of your estate for estate tax purposes. This contrasts with revocable trusts, which offer no real tax advantages.
In the eyes of the government, you no longer own assets in an irrevocable trust. The trust owns them. Because you can alter and change a revocable trust, those belongings still count as part of your taxable estate.
Irrevocable trusts also offer asset protection from future creditors and lawsuits. If the document is properly structured by an attorney, you can’t be forced to give up assets in certain irrevocable trusts if you’re sued.
|Feature||Irrevocable Trust||Revocable Trust|
|Ability to change, modify or revoke the document||No||Yes|
|Protection from creditors||Yes||No|
|Tax shelter (estate tax, capital gains tax, etc.)||Yes||No|
Common Types of Irrevocable Trusts
Trusts come in many varieties. Here are a few examples of different irrevocable trusts.
- Irrevocable Life Insurance Trust
- Some people create this type of trust to accept the death benefit of a life insurance policy in order to avoid having its value included in an estate for estate tax purposes. It can also specify when and how that money is distributed to beneficiaries.
- Grantor Retained Annuity Trust
- A grantor retained annuity trust is typically created to shift assets to heirs without triggering gift tax. This type of irrevocable trust is created for a specific time and the creator pays a tax when the trust is first established. Assets are placed under the trust and then an annuity is paid out every year. Annuity payments typically come from interest earned on the assets within the trust.
- Testamentary Trust
- You may choose to write a will that instructs your assets to be placed into a trust after you die. This is known as a testamentary trust, and it is irrevocable by nature because you cannot modify it after you pass away.
How to Change an Irrevocable Trust
While irrevocable trusts are often viewed as ironclad documents, terms may be changed or modified under rare circumstances.
One option, known as judicial modification, involves going to court and asking a judge to change the terms of the trust to align with the trust maker’s intent, such as tax‐saving objectives.
For example, if circumstances have changed, and the irrevocable trust is now outdated or unreasonably expensive to maintain, the appointed trustee and/or beneficiaries can request for the trust terms to be modified in court.
They can also ask for the trust to be completely terminated through mutual agreement or judicial modification.
Beneficiaries may also be able to ask a court to “decant” the trust. This involves creating a new trust with updated terms, then transferring the first trust’s property into the new one.
If you are a trustee or beneficiary of an irrevocable trust, it is important to carefully review the trust agreement for information on state laws that govern its provisions.
Then consult with an estate planning attorney to learn if it’s possible to modify the terms.
8 Cited Research Articles
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- Internal Revenue Service. (2020, July 15). Estate Tax. Retrieved from https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax
- Carson, R. (2020, February 24). Do You Need A Trust? 8 Important Goals A Trust Can Help You Achieve. Retrieved from https://www.forbes.com/sites/rcarson/2020/02/24/do-you-need-a-trust-8-important-goals-a-trust-can-help-you-achieve/#2b63557052d4
- Internal Revenue Service. (2020, February 3). Estates and Trusts. Retrieved from https://www.irs.gov/e-file-providers/estates-and-trusts
- Ebeling, A. (2019, November 6). IRS Announces Higher Estate And Gift Tax Limits For 2020. Retrieved from https://www.forbes.com/sites/ashleaebeling/2019/11/06/irs-announces-higher-estate-and-gift-tax-limits-for-2020/#5cf2bbe42efb
- Ebeling, A. (2013, June 5). How To Kill An Irrevocable Trust. Retrieved from https://www.forbes.com/sites/ashleaebeling/2013/06/05/how-to-kill-an-irrevocable-trust/#3aa44c511b1c
- Votta, D. (2013, April 29). Why An Irrevocable Trust Can Be Superior to Gifting. Retrieved from https://www.foxbusiness.com/features/why-an-irrevocable-trust-can-be-superior-to-gifting
- CNN Money. (n.d.). What kind of trusts are there? Retrieved from https://money.cnn.com/retirement/guide/estateplanning_trusts.moneymag/index2.htm?iid=EL