An irrevocable living trust can provide benefits not available with a revocable trust. Learn how an irrevocable trust can avoid taxes, protect property from creditors, and preserve property if Medicaid or other government benefits become desirable.
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updated September 1, 2023 · 3min read
An irrevocable trust is a type of legal arrangement that cannot be terminated and the terms of which cannot be changed unless the named beneficiary or beneficiaries agree. Some people choose to create irrevocable trusts to reduce taxes and protect assets, including from creditors or other claims after the death of the trust's creator.
Irrevocable trusts have several potential advantages, including:
You may also use irrevocable trusts for specific reasons, such as using a special needs trust to provide for disabled beneficiaries.
The person who creates a trust is called the grantor, and the person who manages the trust is called the trustee, who may also be the grantor. The people or organizations for whom the trust is created are beneficiaries.
The grantor funds the trust by placing assets in it. At this point, the grantor relinquishes control of the assets, which become registered or titled in the name of the trust.
Upon the grantor's death, the trust assets are distributed to beneficiaries according to the terms of the trust as devised by the grantor. This framework also allows the grantor to place conditions on distributions, such as allowing minors access to the funds only after a certain age or milestone or for a particular period of time, in a "spendthrift trust."
A trust may be either revocable or irrevocable. With a revocable trust, the grantor retains full control of the assets placed in the trust, may remove them from the trust, change the beneficiaries, and cancel or revoke the trust entirely.
With an irrevocable trust, the grantor gives up control of the trust and its assets.
Once the ownership of an asset is transferred to the trust, the grantor may not remove it from the trust. The grantor may also not change beneficiaries, modify any of the terms of the trust, or revoke it.
Because assets placed in an irrevocable trust are no longer the property of the grantor, an irrevocable trust can, for example, allow the grantor to overcome the Medicaid income requirement. Irrevocable trusts can also protect and preserve property that might otherwise be lost to creditors.
Several types of irrevocable living trusts are specifically designed to avoid or reduce state and federal estate taxes. For example, AB, bypass, or Qualified Terminal Interest Property (QTIP) trusts are used by spouses to delay taxes until the second spouse dies. Generation-skipping trusts offer similar advantages (subject to the generation-skipping tax) by delaying taxes until the grandchild (as opposed to the child of the grantor) dies.
Other irrevocable trusts that offer potential tax advantages include the following:
An irrevocable living trust can have benefits for both the wealthy and those of modest means. Because creating irrevocable trusts can have long-lasting and serious consequences for you during your lifetime as well as for your estate, you should seek professional advice if you are interested in establishing an irrevocable trust.
by Michelle Kaminsky, J.D.
Freelance writer and editor Michelle Kaminsky, Esq. has been working with LegalZoom since 2004. She earned a Jur...
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