You want your loved ones to be taken care of after you pass away, and
A trust can be irrevocable or revocable. So, what is an irrevocable trust, and how does it differ from a revocable trust? And what types of irrevocable trusts are available? Here's what you should know.
What is an irrevocable trust?
In short, an irrevocable trust is a trust that holds deposit accounts established through a statute or other written agreement. Once formed, an irrevocable trust can't be changed without a court order or by mutual agreement of the trust's beneficiaries. This applies to any modification, amendment or cancellation. Within the structure of this type of trust, there are key roles that contribute to how it works. These include:
Parties to a trust
- Grantor. This is the person(s) who forms the trust by giving the assets to be set aside. The grantor decides how the trust is structured and chooses one or more beneficiaries.
- Trustee. The trustee is responsible for making sure the trust is administered according to the legally binding terms of the agreement. Trustees have a fiduciary responsibility to manage the assets in the beneficiaries' best interest.
- Beneficiary. A beneficiary is the person or entity that receives the benefits of the assets held in the trust. There must be at least one beneficiary, but there can be multiple.
Revocable vs. irrevocable trusts
Choosing whether to establish a revocable or irrevocable trust depends on your needs and goals in forming the trust. The key difference between these trusts is that while you generally can't modify or terminate an irrevocable trust once it's formed, you do have that ability with a revocable trust.
Benefits of an irrevocable trust
If you can make changes as you see fit with a revocable trust but not with an irrevocable trust, why would you choose an irrevocable trust and give up that control? An irrevocable trust can provide several distinct benefits. Depending on your goals for the trust and reasons for creating it, these advantages may make an irrevocable trust a better choice.
Most benefits an irrevocable trust provides rely on the fact that assets in an irrevocable trust no longer belong to you as the grantor. They become the legal property of the trust. As such, here are some factors to consider when establishing your trust as irrevocable:
- The assets aren't included in your estate. This can help reduce the size of your estate and the amount of any tax liability the estate may incur.
- Any income the assets produce in the irrevocable trust is taxed to the irrevocable trust and isn't included in your taxable income. The trust is its own taxpayer.
- Placing assets in an irrevocable trust provides protection from creditors' claims and judgments from lawsuits because it removes them from your ownership.
- If structured correctly, these assets no longer count against you or the beneficiary when it comes to qualifying for government assistance related to
disabilities or special needs,like Medicaid or Supplemental Security Income.
Types of irrevocable trusts
Many types of trusts can be made irrevocable. Some examples include:
A trust whose terms become effective during your life is a living trust. In contrast, a testamentary trust only becomes effective when you pass away. Living trusts can also be revocable.
Irrevocable life insurance trust (ILIT)
Holding life insurance within a trust prevents the death benefit from being included in your estate. The trust terms can also control how the proceeds are distributed. With this type of trust, you don't retain any incidents of ownership in the life insurance contract, and premiums are generally paid with assets that are gifted to the trust using the annual gifting exclusion ($17,000 per donee in 2023.) Premiums can also be paid from other assets held in the trust (i.e., cash or other investable assets), assuming the trust is funded with these types of assets.
Grantor-retained annuity trust (GRAT)
This type of trust allows you to receive income from the assets in the trust for a set period of time. After that time, the assets are passed to the beneficiaries with minimal or no gift tax obligations.
Qualified personal residence trust (QPRT)
Placing a personal residence in a QPRT allows you to transfer ownership of your home to beneficiaries with reduced potential gift tax liability while continuing to live in the home. If you die before the trust expires, then the residence is included in your estate.
Charitable remainder trust (CRT)
Charitable lead trust
This is the opposite of a charitable remainder trust. Income from the assets goes to the charity of your choice. When the trust expires after a set period of time or at the time of your death, the assets are left to beneficiaries.
Trusts and the SECURE Act
Passed in 2019, the
In 2022, the U.S. House of Representatives passed a successor bill, commonly referred to as the SECURE Act 2.0, that could introduce further changes to these rules. As such, it's worth keeping an eye out for any potential adjustments if you're interested in getting a trust in the next few years.
Getting help with an irrevocable trust
In the right situation, an irrevocable trust can be a great tool for protecting your assets, reducing taxes or
To understand if an irrevocable trust is right for you,