What is an Irrevocable Trust?

An Irrevocable Trust Can't Be Changed -- Or Can It?

An irrevocable trust is one that, by definition and design, can't be amended, modified, changed or revoked. In other words, the written terms of the trust agreement are generally set in stone after the trust has been created. They can't be tweaked for any reason in the future.

So why do it then? Why create a trust that's so ironclad? These trusts offer a few distinct advantages over their revocable counterparts.

Advantages of an Irrevocable Trust 

An irrevocable trust can protect your assets if you work in a profession that puts you at risk for certain lawsuits -- or even if you don't. You cannot take property back after you transfer ownership into an irrevocable trust, so it's safe from creditors and anyone who holds a judgment against you if you want to ensure that it's preserved for your beneficiaries. You no longer own it -- your trust does, and a creditor or judgment holder can't take property from anyone or anything that's not a party to the lawsuit. 

Property in your irrevocable living trust does not contribute to the gross value of your estate for estate tax purposes for the same reason. This can be beneficial if you have a very large estate. As of 2016, estates valued at more than $5.45 million are subject to estate taxes on the balance of their values over this threshold. The top tax rate is 40 percent.

This threshold, called an exemption, is indexed for inflation so it will go up annually. 

Assets you own count against you for purposes of qualifying for certain government benefits, such as Medicaid and Supplemental Security Income. Even if your estate is nowhere near large enough that estate taxes might become an issue, transferring assets out of your ownership can avoid depletion of your property to pay for a nursing home care in your later years.

An irrevocable trust can also protect assets for a special needs child when it's designed in such a way as to avoid disqualifying her for crucial government benefits. 

Types of Irrevocable Trusts

These trusts come in two basic forms:

  1. Living Trusts: This type of irrevocable trust, also called an "inter vivos" trust, is created and funded by an individual during his lifetime. Examples include irrevocable life insurance trusts, lifetime gifting trusts such as qualified personal residence trusts, grantor retained annuity trusts (GRAT for short), and spousal lifetime access trusts (SLAT for short). They also include charitable trusts such as charitable remainder trusts and charitable lead trusts.
  2. Testamentary Trusts: All testamentary trusts are irrevocable because this form of trust is created and funded after someone's death according to the terms contained in his will. No one with the legal authority or ability to change the terms of a testamentary trust after it's been formed is still living by the time it goes into effect, although this is not the case before death. A trustmaker can amend his will, taking out provisions for a testamentary trust, at any point during his lifetime. It can effectively be revoked before it ever exists. 

    A Note About Revocable Trusts 

    A revocable trust does not protect against lawsuit liability or estate taxes because you can reclaim the property you place into it at any time. The law therefore considers that you still personally own this property, so its value can be counted for purposes of qualifying for certain government benefits as well.

    A revocable trust automatically becomes irrevocable at your death because you're no longer available to make changes to it or revoke it. 

    Refer to Can an Irrevocable Trust Be Changed? to learn about the limited circumstances under which an irrevocable trust can be modified.

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