Irrevocable trust

A trust that generally cannot be changed or canceled once created, used to remove assets from an estate, protect them or control how heirs receive them.

What it means

When someone funds an irrevocable trust, they give up ownership and, in most cases, control of the assets. An independent trustee manages them for the beneficiaries under the trust’s fixed terms. Because the assets usually no longer belong to the grantor, they may be excluded from the grantor’s taxable estate and can be harder for the grantor’s creditors to reach.

Common types include trusts that own life insurance, special needs trusts that support a disabled beneficiary without disrupting public benefits, charitable trusts and trusts used in long-term care planning. Many irrevocable trusts are separate taxpayers that file their own return, and trust income tax brackets reach the top rate at much lower income than individual brackets. Some states allow limited changes through court approval or other procedures, but flexibility is far lower than with a revocable trust.

Example

For example, a parent creates an irrevocable trust to own a $1 million life insurance policy. If set up correctly, the death benefit is paid to the trust for the children and generally is not counted in the parent’s taxable estate.

How it’s used

Reducing a large estate that may owe estate tax
Providing for a beneficiary with special needs
Controlling when and how heirs receive money

Strengths and weaknesses

Strengths

Assets may be removed from the taxable estate
Can offer protection from creditors and lawsuits
Lets the grantor set lasting rules for distributions

Weaknesses

Very hard to change or undo
Grantor gives up control and access to the assets
Setup, administration and tax filing can be costly
Assets removed from the estate may not get a step-up in basis at death

Good to know

Rules vary by state and by trust type, and these trusts are typically drafted by an estate attorney.

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.