An irrevocable trust is an unalterable agreement made by a person, the trustor, regarding the assets he places in the trust for the benefit of the recipients, referred to as beneficiaries. The trustees of the trust manage the assets and follow the trust agreement's directions for disbursements to the beneficiaries of the trust's contents. A trustor can name whomever he wants as beneficiaries, including family members, businesses and friends. However, some types of beneficiaries receive special consideration in an irrevocable trust.
A trustor can use an irrevocable trust to provide for beneficiaries under 21 years of age at the time of the trust's creation. When minors are beneficiaries, the aim of the trust is typically to provide for their living expenses and educational needs, but the trust can continue for any length of time the trustor includes in the trust papers. Under IRS rules, the trust's terms must give the guardian of the child or the child himself the right to withdraw a new addition within 30 days of its transfer to the trust.
Charitable organizations can be beneficiaries under an irrevocable trust. A charitable remainder trust allows the trustor to name beneficiaries other than charities — such his children — and give the beneficiaries a yearly payment of at least 5 percent but not more than 50 percent of the trust's value under IRS regulations. Once the beneficiaries die, the balance of the trust goes to the charitable organizations named in the trust papers. However, at least 10 percent of the trustor's total contributions must remain in the trust for the charitable organizations at all times.
Recipient of Government Help
A disabled person's eligibility for government help, such as health coverage under Medicaid or Supplemental Security Income payments, is subject to limitations on her financial resources. A supplemental needs trust is a type of irrevocable trust designed to prevent a beneficiary who receives government help from being disqualified. Instead of disbursements from the trust at set times defined in the trust papers, a supplemental needs trust typically leaves distribution times and amounts up to the trustee. The trust is meant to cover the beneficiary's needs by providing additional assistance beyond what the government program provides, and not to bypass program rules.
An irrevocable life insurance trust allows the trust itself to be a beneficiary of a life insurance policy placed in the trust by the trustor. The money from the policy becomes part of the trust balance rather than the insured's estate upon his death. The IRS has rules regarding the different types of irrevocable trusts for both beneficiaries and trustors, and states also have regulations regarding irrevocable trusts. The type of tax breaks a beneficiary receives for the irrevocable trust income depends on the trust type.