What is an Irrevocable Trust?

Cartoon of woman trying to remove son from trust after destroying her car

Irrevocable trusts are trusts that cannot be altered or cancelled after they are created. Irrevocable trusts can be either irrevocable living trusts if established during the creator’s (the Settlor) lifetime or a testamentary trust established after death.

For irrevocable living trusts, the inability to modify or cancel an irrevocable trust after it is created in most cases makes it a less flexible and desirable approach than a revocable living trust, which can be altered or cancelled in its entirety so long as the creator continues to hold capacity to manage his or her own affairs. In select other cases, this irrevocability – though limiting – is a strategic advantage as it places assets out of the creator’s estate and potentially outside the reach of creditors and estate taxes.

Do I need an irrevocable trust?

Whether you need an irrevocable trust depends on your personal estate planning goals.

Some last will and testaments create or allow for the possibility to create irrevocable testamentary trusts upon the death of the Willmaker to help facilitate the estate administration process. Allowing for the creation of a testamentary trust can be a good idea if you are making distributions to minor beneficiaries or a beneficiary who may be subject to certain claims or judgements that you wouldn’t want to capture a share of your gift distribution.

Individuals who choose to create irrevocable living trusts typically do so for one or more of three different reasons:

  1. Minimize estate taxes
  2. Become eligible for need-based government programs and assistance
  3. Protect assets from creditors

Nonetheless, for most people who simply want to avoid probate or benefit from any of the other non-tax advantages of trusts, revocable living trusts are a better fit than irrevocable living trusts. The flexibility to modify or cancel a revocable living trust makes them better adapted to possible changes in your life or desires.

Types of irrevocable trusts

There are many different kinds of irrevocable trusts. A few of the more common ones are:

  • Testamentary trusts: created on the death upon the death of some Willmakers to facilitate estate administration, especially if the Willmaker is making distributions to minor beneficiaries are establishing a “spendthrift” trust to guard against a beneficiary’s creditors attaching claims to the gift distributions
  • Charitable lead or charitable remainder trusts: irrevocable living trusts in which either the lead interest or the remainder interest in the trust assets is distributed to one or more charitable organizations. These trusts are typically created to pursue philanthropic interests while also potentially delivering tax savings to the creator and/or beneficiaries
  • Asset protection trusts: these irrevocable living trusts place assets outside the reach of lawsuits, creditors, and judgments. Asset protection trusts are typically employed by individuals with significant wealth whose lifestyle or profession places them at higher risk for such third-party claims
  • Special needs trusts: deliver a stream of income or other distributions to a beneficiary as supplemental support to government need-based programs. This irrevocable trust setup allows the disabled or special needs beneficiary to meet the often strict asset and income eligibility requirements of the government-funded programs, receiving the ‘core’ benefits of the program for free with the trust picking up the bill for any benefits or needs that are not funded by the program

How do you create an irrevocable trust?

Irrevocable testamentary trusts are created upon the death of the Willmaker by the Willmaker’s Executor or Personal Representative in accordance with the instructions in the last will.

If you are creating an irrevocable living trust during your lifetime, you should engage an experienced estate planning attorney for drafting and counsel. Make sure that you engage a specialist and not a generalist. Some irrevocable living trusts have fairly sophisticated legal and administrative requirements, and even an attorney can make accidental missteps, especially if that attorney does not specialize in estate planning day-in and day-out.

If you plan to create an irrevocable living trust, check out our tips on how to find an estate planning attorney. If you are like most people and do not need to worry about triggering estate tax, becoming eligible for need-based government programs, or protecting assets from creditors, consider a revocable living trust instead.