Irrevocable Trust

An irrevocable trust is a legal arrangement in which a grantor transfers assets out of their ownership into a trust that generally cannot be changed, amended, or revoked without the consent of the beneficiaries or a court order. Because ownership shifts to the trust and a trustee manages the assets for beneficiaries, irrevocable trusts are commonly used for estate-tax planning, asset protection, and qualifying for certain government benefits.

Key takeaways

• Irrevocable trusts remove assets from the grantor’s taxable estate, which can reduce estate taxes and shield assets from creditors.
• Once funded, the grantor generally gives up control of trust assets; legal title rests with the trustee.
• There are two main forms—living (inter vivos) irrevocable trusts created during life, and testamentary trusts created by a will at death.
• Uses include estate-tax planning, asset protection, Medicaid and special-needs planning, life insurance planning, and staged or conditional distributions to beneficiaries.
• Trust design and tax consequences can be complex; consult an estate or tax attorney before creating one.

How an irrevocable trust works

When a grantor transfers property into an irrevocable trust, the trust becomes the legal owner of those assets. The trustee has fiduciary duties to manage and distribute trust property according to the trust’s terms for the benefit of named beneficiaries.

Primary effects:
* Removes the transferred assets and associated “incidents of ownership” from the grantor’s taxable estate.
Shifts income tax liabilities and control of distributions to the trust or trustee (depending on trust structure).
Makes the assets generally unavailable to satisfy the grantor’s personal creditors and legal judgments.

To obtain estate- and asset-protection benefits, the grantor generally must not retain forbidden powers (for example, complete control over distributions). State law and specific trust terms determine what changes, if any, are permitted after funding.

Modern trust drafting often includes flexible mechanisms—such as decanting (moving assets into a new trust with improved terms) or changing a trust’s state of domicile—to adapt to legal and tax developments.

Types of irrevocable trusts

Irrevocable trusts come in two broad categories:

Living (inter vivos) irrevocable trusts — created and funded during the grantor’s lifetime. Common examples:
* Irrevocable life insurance trust (ILIT) — holds life insurance so proceeds are generally excluded from the grantor’s estate.
Grantor-retained annuity trust (GRAT) — used for transferring appreciating assets while retaining an annuity for a fixed term.
Spousal lifetime access trust (SLAT) — provides benefits to a spouse while removing assets from the grantor’s estate.
Qualified personal residence trust (QPRT) — transfers a residence while retaining the right to live there for a term.
Charitable remainder trust and charitable lead trust — combine philanthropic goals with tax or income planning.

Testamentary trusts — created through a will and funded at death. These are irrevocable by design once the testator dies; changes require amending the will prior to death.

Common uses

Irrevocable trusts are used for:
* Estate-tax reduction: remove assets from the gross estate to reduce estate taxes for large estates.
Asset protection: shield assets from creditors and judgments for professions with higher liability risk.
Life insurance planning: keep policy proceeds out of the taxable estate.
Medicaid and government-benefit planning: structure assets to meet eligibility rules (often using specialized Medicaid or special-needs trusts).
Controlled distributions: restrict or schedule how beneficiaries receive principal and income to prevent misuse.
* Gifting and basis planning: transfer appreciating assets outside the estate; specific trust designs may affect the basis beneficiaries receive.

Irrevocable vs. revocable trusts

• Revocable trusts: grantor can amend or revoke during life, retains control, and assets generally remain part of the taxable estate. They simplify probate but offer little creditor protection.
• Irrevocable trusts: cannot be easily changed or revoked, provide stronger asset protection and estate-tax benefits, but require surrendering control and can have complex tax implications.

Note: a revocable trust typically becomes irrevocable at the grantor’s death.

SECURE Act and retirement accounts in irrevocable trusts

The SECURE Act changed rules for distributions from inherited retirement accounts. For many non-spouse beneficiaries, the “stretch” of lifetime distributions has been replaced by a 10-year rule: the account must be fully distributed by the end of the tenth calendar year after the owner’s death. When retirement accounts are payable to an irrevocable trust, careful drafting and trustee selection are required to preserve any favorable distribution treatment that may still apply.

Practical considerations

• Trustee selection: the trustee controls trust assets; choose someone who understands fiduciary duties or hire a professional.
• Grantor powers: retaining certain powers can cause trust assets to be treated as part of the grantor’s estate for tax or creditor purposes.
• State law: rules on modification, decanting, creditor protection, and taxation vary by state.
• Timing: some asset transfers may trigger gift taxes; lifetime gifting strategies and use of exemptions should be coordinated with tax advice.
• Professional advice: because trust law and tax rules are complex and situation-dependent, work with an estate attorney and tax advisor to design and fund an irrevocable trust properly.

Frequently asked questions

What control does the grantor retain?
Typically very little—legal title is with the trustee and the grantor cannot unilaterally revoke or change distributions once the trust is properly funded.

Can an irrevocable trust be changed?
Only with the beneficiaries’ consent, by court order, or through specific statutory mechanisms (such as decanting or trust modification statutes), depending on jurisdiction and trust language.

Who benefits from an irrevocable trust?
People seeking estate-tax reduction, asset protection (for example, professionals at higher liability risk), life insurance planning, Medicaid or special-needs planning, and those who want to control how heirs receive assets over time.

Bottom line

Irrevocable trusts are powerful tools for estate-tax planning, asset protection, and benefit-eligibility strategies, but they require irrevocable relinquishment of control and careful drafting to achieve intended outcomes. Because of varied state laws and significant tax implications, consult an experienced estate planning attorney and tax advisor before establishing or funding an irrevocable trust.