Advantages of an Irrevocable Trust

By Ronna L. DeLoe, Esq.

Advantages of an Irrevocable Trust

By Ronna L. DeLoe, Esq.

An irrevocable trust is a type of trust that cannot be revoked or changed except in limited circumstances. When you set up your estate plan, most often, an estate attorney will advise you to set up one or more trusts, including an irrevocable trust. There are benefits to this kind of trust, as well as drawbacks, but depending on the amount of your estate, an irrevocable trust could be beneficial.

Advantages of an Irrevocable Trust

Find out whether it might be in your interest to consider setting up an irrevocable trust.

What Is an Irrevocable Trust?

A trust is a document that creates a legal arrangement whereby you, as the grantor of the trust, place certain items in the trust for your beneficiaries, which they receive at your death or at a certain date after you pass. The property you own, such as real estate, life insurance policies, cash, and bonds, get transferred to the trust so that the trust owns it. This property then gets transferred to beneficiaries upon your death pursuant to the terms of the trust. Either you manage the trust during your lifetime as trustee or someone else you name as trustee manages the trust.

In an irrevocable trust, once the property gets transferred into the trust and you decide who the beneficiaries are, you may not have access to the property, change the beneficiaries, or change the trust. You surrender control of these assets once they're placed in an irrevocable trust. On the other hand, in revocable trusts, you can use the property during your lifetime and either modify or terminate the trust at any time.

How to Set Up an Irrevocable Trust

Setting up an irrevocable trust is complicated. It's important to have a trust and estate attorney create it for you so that it's done correctly.

Creating an irrevocable trust is much like creating a revocable trust. Steps to set up an irrevocable trust include deciding:

  • What property you want to give to your beneficiaries
  • Who the beneficiaries will be
  • Who the trustee, and successor trustee, if any, will be—as the grantor, you cannot be the trustee
  • Who you will hire as an attorney to create the trust

The next steps involve having the attorney create the trust, and once it's created, having you place assets in the trust that you want to be distributed after your passing.

How to Modify an Irrevocable Trust

Because the trust is irrevocable, it cannot be modified. There are exceptions to this, though, as modification can occur when all the beneficiaries agree to a modification, or if a court agrees that you can modify it.

In some states, the trustee can modify or terminate the trust if circumstances have changed, rendering the trust no longer appropriate or what you would have wanted under the new circumstances. The trustee, in these states, may terminate the irrevocable trust and place the assets in a new or different trust that's more in line with what you wanted and more favorable due to the changed circumstances.

Advantages of an Irrevocable Trust

Irrevocable trusts have advantages and disadvantages, but the advantages may outweigh the disadvantages, depending on your estate. Usually, an estate attorney wouldn't necessarily recommend an irrevocable trust for someone with a small estate because you can't use the assets or property during their lifetime, you can't change the beneficiaries or terms of the trust, you can't terminate the trust, and you, as the grantor, give up control to the assets you put into the trust.

However, in certain circumstances, such as where the estate contains a lot of money or property, where you think creditors or the IRS may come looking for your assets, or where you are in a profession which invites lawsuits, such as an attorney or a physician, having an irrevocable trust is a great idea.

The benefits of an irrevocable trust include:

  • Preventing the IRS and state from taxing assets in your irrevocable trust after you pass; this is applicable mostly to large estates
  • Allowing you to set certain conditions for distribution to the beneficiaries, such as when they turn a certain age
  • Protecting your assets during your lifetime from creditors and lawsuits
  • In some cases, preventing your former spouse or the spouse of a beneficiary from obtaining the property in a divorce
  • Allowing you, as the grantor, to qualify for Medicaid or SSI under Social Security, during your lifetime, by removing these assets from your income
  • Allowing a special needs beneficiary to qualify for assistance by becoming eligible under the terms of the trust
  • Allowing assets to remain in your family, if you so desire

There are substantial advantages to having an irrevocable trust, although most advantages have to do with taxes and are more suited to people who have large estates. Still, even people with smaller estates can benefit from having an irrevocable trust under the right circumstances. Discuss this with a trusts and estates attorney to see if preparing an irrevocable trust is right for your estate plan.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.