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 set in stone after the trust has been created. They can't be tweaked for any reason in the future, except under some isolated and rare circumstances.
So why do it then? Why create a trust that's so ironclad? These trusts offer a few distinct advantages over their revocable counterparts.
An Irrevocable Trust and Creditors
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 can't take the 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.
An Irrevocable Trust and Estate Taxes
Property that you've transferred to an irrevocable living trust does not contribute to the gross value of your estate for estate tax purposes. Just as your creditors and judgment holders can't reach it because you no longer own it, neither can the Internal Revenue Service tax your estate on it -- because you no longer own it and it, therefore, does not contribute to your estate. This can be beneficial if you have a very large estate. As of 2017, estates valued at more than $5.49 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 goes up annually.
An Irrevocable Trust and Government Benefits
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 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:
- 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.
- Testamentary Trusts: All testamentary trusts are irrevocable because they're not created and funded until after their creators' death. These trusts are set according to the terms contained in the deceased's will. No one with the legal authority or ability to change the terms of a testamentary trust is still living by the time it goes into effect, so it's automatically irrevocable, although this isn't the case before death. A trustmaker can amend his will, taking out the 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
Although you can dissolve or amend a revocable trust any time you choose to as long as you're still mentally competent, these trusts don't protect against lawsuit liability or estate taxes the way irrevocable trusts do. By its very nature, 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.