How an Irrevocable Trust Works
An irrevocable trust is a trust that can't be changed or canceled after its creation, at least not without the consent of all beneficiaries or the approval of a court. The trust avoids probate, the legal process required to transfer ownership of assets from a deceased individual to a living beneficiary.
By contrast, revocable trust remains in the possession of the owner, because it can be modified or liquidated at any time. That means the owner has full access to the funds up until the time of their death.
A trust can hold on to the assets and transfer them to your beneficiary weeks, months, or even years after your death. An irrevocable trust's terms never become a matter of public record, because your trust isn't subject to probate. If you simply leave a will, it must be filed with the court to open probate. Anyone can read it.
When you fund your irrevocable trust with money or assets, you automatically provide a way for ownership of those assets to move to beneficiaries of your choice at the time of your choice, so probate becomes unnecessary.
An irrevocable trust protects assets in case of a lawsuit. You can't take property back after you transfer ownership of it into an irrevocable trust, so your creditors or judgment holders can't reach it, either.
Examples of an Irrevocable Trust
If you create an irrevocable trust for a beneficiary to receive the money after he graduates from college, and you later decide you'd rather have him receive the money when he is 18, you wouldn't be able to change that plan, because the trust couldn't be changed, modified, or amended.
In some instances, you can make changes to your irrevocable trust.
Most states have legal options in place to allow your beneficiaries to undo an irrevocable trust under certain circumstances that you could not have foreseen. This typically requires the unanimous consent of all beneficiaries, and it might not be possible if any of them are minors. They can also ask a court to "decant" the trust, which involves creating a new trust with more up-to-date terms and moving the first trust's property into that one.
A court can determine that you created an irrevocable trust to keep the property and funds out of the hands of a judgment holder if you fund it while a lawsuit is pending against you, even if an event has occurred for which you might be sued. Your trust arrangement could be overturned if it can be proved that you created it in "contemplation" of an event.
You can also write the trust's formation documents to give the appointed trustee power and flexibility to address unforeseen circumstances. For example, a grandparent might designate funds for a grandchild's education, but the grandchild could develop a life-threatening medical condition requiring expensive treatment after the grandparent's death. The trustee might seek a modification allowing funds to cover treatment for the best interest of the child.
Tax Treatment of Property in an Irrevocable Trust
Property transferred into an irrevocable living trust does not contribute to the value of your estate for estate tax purposes.
Estates valued at more than $11,700,000 in 2021, or more than $12,060,000 in 2022, are subject to a federal estate tax on the balance of their values over this threshold. Under the terms of the Tax Cuts and Jobs Act (TCJA), these exemptions will remain valid after 2025 for contributions made to a trust before that time. The exemption level is scheduled to return to the $5 million range (adjusted for inflation) when the TCJA expires at the end of 2025.
Assets in an irrevocable trust may count against you or a beneficiary for purposes of qualifying for certain government benefits, including Supplemental Security Income. Assets in an irrevocable trust may not be "counted" as your assets by Medicaid, as long as you put the assets into the trust before the "look-back period."
In most states, funding an irrevocable trust at least five years before needing nursing home assistance protects those assets, because you've given them away to the trust and no longer have control over them.
An irrevocable trust can also protect special-needs beneficiaries by allowing them to qualify for government benefits, which they might not be able to do if they were to inherit assets outright.
Types of Irrevocable Trusts
Irrevocable trusts come in several different forms:
Also called an "inter vivos trust," this any trust that's created and funded by an individual during their lifetime.
These trusts are always irrevocable, because they're not created and funded until after their creators' deaths. They're established according to terms contained in the deceased's last will and testament.
Irrevocable Life Insurance Trust (ILIT)
This type of living trust can be set up to accept the death benefits at the time of your death to avoid having their value included in your estate for estate tax purposes.
An irrevocable charitable remainder trust pays beneficiaries first, then distributes the balance of your assets to a charity. You can also set it up to work as a charitable lead trust, paying the charity first.
Irrevocable Trust vs. Revocable Trust
|Irrevocable Trust||Revocable Trust|
|Cannot be amended, modified, or revoked||Can dissolve at any time if you're still mentally competent|
|Probate unnecessary||Counts as current income, because you can revoke it at any time|
|Remains private||No estate tax protection|
|Can decide when beneficiary should inherit||No lawsuit protection|
Alternatives to an Irrevocable Trust
A revocable trust is one that you can dissolve or amend any time you like if you're still mentally competent, so it doesn't protect against lawsuit liability or estate taxes. You can reclaim the property you place into a revocable trust, so the law considers that you're still the owner. A revocable trust automatically becomes irrevocable at your death, because you're no longer available to change or revoke it.
- Irrevocable trusts are intended to be permanent once they're created.
- An irrevocable trust can provide tax benefits and protect assets from lawsuits.
- You can specify when and how to distribute your assets after your death.
- Most states offer provisions for beneficiaries to make changes under certain circumstances.
The American College of Trust and Estate Counsel. "Can I Change My Irrevocable Trust?"
Internal Revenue Service. “IRS Provides Tax Inflation Adjustments for Tax Year 2022.”
Internal Revenue Service. "Estate Taxes."
Internal Revenue Service. "Estate and Gift Tax FAQs."
Social Security Administration. "Understanding Supplemental Security Income – 2021 Edition," Pages 84-85.
Pennsylvania. "Medical Assistance and Payment
Illinois Revenue Department. "What Is an Inter Vivos Trust?"
Illinois Revenue Department. "What Is a Testamentary Trust?"
Internal Revenue Service. "Abusive Trust Tax Evasion Schemes - Special Types of Trusts."
Internal Revenue Service. "Charitable Trusts."