What Is an Irrevocable Trust?

Definition & Examples of Irrevocable Trust

Family meeting with Insurance Agent.
••• skynesher/Vettta/Getty Images

An irrevocable trust is one that generally cannot be amended, modified, or revoked once it is created. The written terms of the trust agreement—the trust's formation documents—are set in stone, with only rare exceptions.

What Is an Irrevocable Trust?

An irrevocable trust cannot be changed upon its creation, in most instances. The trust avoids probate, the legal process required to transfer ownership of assets from a deceased individual to a living beneficiary.

When you fund your irrevocable trust with money or assets, you automatically provide a way for ownership of those assets to move to people of your choice at the time of your choice, so probate becomes unnecessary.

Your trust can also hold onto 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 if your trust is not subject to probate. If you simply leave a will, it must be filed with the court to open probate. Anyone can read it.

Irrevocable Trust vs. Revocable Trust
Irrevocable Trust  Revocable Trust 
Cannot be amended, modified, or revoked while mentally competent  Can dissolve at any time if 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 
Tax protections  
Lawsuit protection   

A revocable trust, meanwhile, remains 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 death.

How an Irrevocable Trust Works

An irrevocable trust protects assets if you work in a profession that puts you at risk for lawsuits. Because you can't take the property back after you transfer ownership of it into an irrevocable trust, your creditors or a judgment holder can't reach it, either.

If you fund your irrevocable trust while a lawsuit is pending against you, or even if an event has occurred for which you might be sued, a court can determine that you did so in order to keep the property and funds out of the hands of a judgment holder. Your trust arrangement could be overturned if it can be proved that you created it in "contemplation" of an event.

Tax Treatment

Property transferred into an irrevocable living trust does not contribute to the value of your estate for estate tax purposes. 

This can be beneficial if you have a very large estate. Estates valued at more than $11,400,000 in 2019 and $11,580,000 in 2020 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), the exemption will remain valid after 2025 for contributions made by then to a trust. The exemption level is scheduled to return to the $5 million range (adjusted for inflation) when the TCJA expires at the end of 2025. 

Benefit Treatment

Assets in an irrevocable trust won't count against you or a beneficiary for purposes of qualifying for certain government benefits—including Medicare, Medicaid, and Supplemental Security Income. 

Funding an irrevocable trust at least five years before needing nursing home assistance protects those funds because you've given them away to the trust.

An irrevocable trust can also protect special-needs beneficiaries by allowing them to qualify for government benefits, as opposed to if they inherit assets outright.

Types of Irrevocable Trusts

Irrevocable trusts come in various forms:

Living Trust

Also called an inter-vivos trust, this is created and funded by an individual during their lifetime.

Testamentary Trust

These are always irrevocable because they're not created and funded until after their creators' deaths. These trusts are 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.

Charitable Trust

An irrevocable charitable remainder trust pays beneficiaries first, then distributes the balance of your assets to a charity, or you can set it up to work as a charitable lead trust, paying the charity first.

How to Change an Irrevocable Trust

Most states have legal options in place to allow your beneficiaries to undo the trust under certain circumstances that you could not have foreseen.

This typically requires unanimous consent of all beneficiaries, and might not be possible if any 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.

You can also write the trust's formation documents to give the appointed trustee power and flexibility to address unforeseen circumstances. For example, a grandmother might designate funds for a grandchild's education, but after the grandmother's death, the grandchild develops a life-threatening medical condition requiring expensive treatment. The trustee might seek a modification allowing funds to cover treatment for the best interest of the child.

Alternatives to an Irrevocable Trust

A revocable trust is one you can dissolve or amend any time you like if you're still mentally competent, so these trusts don't protect against lawsuit liability or estate taxes. You can reclaim the property you place into a revocable trust, so the law considers you the owner. A revocable trust automatically becomes irrevocable at your death because you're no longer available to change or revoke it. 

Key Takeaways

  • Irrevocable trusts are intended to be permanent once they are created.
  • They provide tax benefits and protection from lawsuits.
  • You can specify when and how to distribute your assets after your death.
  • Most states offer provisions for beneficiaries to make changes in certain circumstances.

NOTE: Always consult with an attorney for the most up-to-date estate-planning advice. The information contained in this article is not intended as legal advice and it is not a substitute for legal advice.

Article Sources

  1. FDIC. "Irrevocable Trust Accounts." Accessed July 21, 2020.

  2. Fidelity. "The Benefits of Funding a Trust." Accessed July 21, 2020.

  3. Internal Revenue Service. "Estate and Gift Tax FAQs." Accessed July 26, 2020.

  4. Charles Schwab. "The Estate Tax and Lifetime Gifting." Accessed July 21, 2020.

  5. Social Security Administration. "Understanding Supplemental Security Income – 2019 Edition," Pages 80-81. Accessed July 21, 2020.

  6. Longtercare.gov. "Financial Requirements — Assets." Accessed July 21, 2020.

  7. Special Needs Alliance. "Your Special Needs Trust (“SNT”) Defined." Accessed Jan. 24, 2020.

  8. Illinois Revenue Department. "What Is an Inter Vivos Trust?" Accessed July 19, 2020.

  9. Illinois Revenue Department. "What Is a Testamentary Trust?" Accessed July 19, 2020.

  10. IRS. "Abusive Trust Tax Evasion Schemes - Special Types of Trusts." Accessed July 21, 2020.

  11. IRS. "Charitable Trusts." Accessed July 21, 2020.

  12. American Bar Association. "Terminating or Modifying Irrevocable Trusts by Consent of the Beneficiaries – A Proposal to Respect the Primacy of the Settlor’s Intent." Accessed July 21, 2020.

  13. American Bar Association. "The Power of Trust Decanting, Part 1." Accessed July 21, 2020.

  14. FDIC. "Revocable and Irrevocable Trust Accounts." Accessed July 21, 2020.