What is an Irrevocable Trust?

An irrevocable trust is a trust which cannot be amended or revoked by the creator of the trust (sometimes referred to as the “grantor”) after it has been created (with limited exceptions). 

Upon creation of an irrevocable trust, the grantor may transfer assets to one or more trustees for safekeeping and management in accordance with the grantor’s instructions set forth in the trust and/or the trustee of the irrevocable trust may procure a life insurance policy insuring the grantor’s life (and/or another party) and designate the irrevocable trust as primary beneficiary of such life insurance policy (upon disbursement, the insurance proceeds would be managed by the trustee in accordance with the grantor’s instructions set forth in the trust).  Once assets are transferred by a grantor into an irrevocable trust, such assets are no longer considered the property of the grantor.  Unlike an inter vivos revocable trust, it is normally recommended that the grantor not designate himself or herself as trustee.  The remainder of this article will assume the following: (i) the grantor is not the trustee, (ii) the grantor retains no power to amend or revoke the trust, and (iii) the trust assets are not considered the property of the grantor.

Probate Considerations

A transfer of assets into an irrevocable trust creates a permanent change in ownership and control over such assets.  As such, property held in an irrevocable trust is not considered property of the grantor and will not be subject to probate upon the death of the grantor.  In addition, the delays associated with the transfer of property upon death and the expenses associated with probate (such as probate taxes and the filing of an inventory and account(s) for the decedent’s estate) can be avoided.

Privacy Considerations

In light of the fact that the assets in an irrevocable trust are not subject to probate, the terms of an irrevocable trust, including the contents of the trust, the identity of its beneficiaries, and the value and composition of its assets, remain private (absent litigation or the terms of the trust requiring or permitting identification).

Tax Considerations

Potential gift tax consequences exist at the time a transfer is made by the grantor into an irrevocable trust.  Once assets are transferred to the trust, the grantor can no longer exercise control over them, and such assets are no longer considered to belong to the grantor for tax purposes.  Accordingly, the income generated by the trust assets is either taxed to the trust or, under certain circumstances, to the beneficiaries of the trust.  In addition, an irrevocable trust, if properly drafted and funded, will not be included in the grantor’s estate for federal estate tax purposes following the death of the grantor.

Change in Circumstances

An irrevocable trust can be used to achieve many estate planning goals.  However, an irrevocable trust is static, in that once the trust is established, it generally cannot be altered to accommodate a change in circumstances of the grantor or one or more beneficiaries (with limited exceptions, such as upon consent of all of the trust beneficiaries if the court concludes that continuance of the irrevocable trust is not necessary to achieve a material purpose of the trust).  The trustee of the irrevocable trust is bound to adhere to the terms of the trust, regardless of the subsequent wishes of the grantor. 

Opting for an Irrevocable Trust

An individual should compare and contrast the advantages and disadvantages of an irrevocable trust and an inter vivos revocable trust when considering his or her estate planning options.  The permanency of an irrevocable trust and the selection of the trustee should be carefully considered.  In addition, if an irrevocable trust is used, the trust should be drafted precisely in accordance with all applicable statutory provisions to ensure that the trust will accomplish the intentions of the grantor.