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What is an Irrevocable Trust? 

Law Office of Jonathan D. Alexander, Esq.

An irrevocable trust is a type of trust that once created is not modifiable by the individual who created it (the “Grantor”).  In fact, this type of trust cannot be changed, amended, or terminated without the permission of the beneficiaries (the individuals or entities that receive, for example, money, property or other assets under the terms of the irrevocable trust).   This is the primary distinction between a revocable living trust, which can be modified and amended by a Grantor and an irrevocable trust, which cannot.

Why are Irrevocable Trusts Used?

Irrevocable trusts are used to transfer assets (e.g., money and/or property) from a Grantor to a beneficiary in order to avoid taxation and to provide asset protection.  A revocable living trust provides a Grantor no asset protection (even though they can be drafted to provide asset protection to beneficiaries). 

Once the assets are transferred to the irrevocable trust, the Grantor no longer owns them.  But if the Grantor no longer owns his assets, cannot act as trustee, and cannot modify this type of trust, why is this a good idea? Irrevocable trusts are a good idea because the proper use of one can help you:

  • To avoid federal and state estate taxation (note, at the time of this post only 17 states impose some type of estate or inheritance tax).  Property transferred to an irrevocable trust does not count towards the value of an estate.  For high value estates—those that exceed the estate and gift tax lifetime maximums—proper irrevocable trust use can avoid millions of dollars in taxation.  The federal estate tax exemption is currently $12,060,000 for an individual and $24,120,000 for a married couple.  The exemption will be essential cut in half ($6 million individual / $12 million for a couple) effective January 1, 2026, so now is the perfect time to use an irrevocable trust to avoid the 40% excise tax for amounts over the exemption. 
  • To prevent beneficiaries from wasting assets.  The Grantor can create rules regarding how the assets will be distributed and under which conditions. 
  • To qualify for federal and state means tested government benefits like Social Security and Medicaid.  This type of planning is especially relevant when planning for a special needs child. You can provide gifts for the benefit can care of a special needs child without interfering with his or her eligibility for government benefits. 

What are Some Common Irrevocable Trusts and How do they Work?

The cornerstone of every estate plan is a revocable living trust; however, the following irrevocable trusts can provide incredible benefits to you and your family:

  1. Spousal Lifetime Access Trust: allows one spouse to create an irrevocable trust for the benefit of the other spouse, while removing the assets from their combined estates.   
  2. Special Needs Trust: allows you to provide support to a disabled individual without interfering with his or her eligibility for government benefits (e.g., Social Security and/or Medicaid).
  3. Charitable Lead Trust: provides financial support to one or more charitable entities for a specified period of time; thereafter, the remaining assets are gifted to family members or other beneficiaries. This is the inverse of a charitable remainder trust.   
  4. Charitable Remainder Trust (CRT):  this trust is a split interest trust whereby you can contribute money, receive a partial tax deduction and an income stream for you as the donor or for other beneficiaries with remainder, after a specified period of time, going to the charity or charities of your choice.   
  5. Charitable Remainder Annuity Trust: this type distributes a fixed annuity amount annually, but additional contributions are disallowed.  
  6. Charitable Remainder Unitrust – this trust distributes a fixed percentage based on the balance of the trust assets (updated and revalued every year).  Additional contributions are allowed. 
  7. Dynasty Trust:  used to pass wealth from one generation to the next but designed to avoid transfer tax like the gift tax or generation-skipping tax while the assets are in trust.
  8. Grantor Retained Annuity Trust: involves transferring quickly appreciating assets to a fixed-term, irrevocable trust.  The Grantor retains the right to receive an annuity stream (a fixed sum of money) during the trust’s term.  When the term ends, the remaining assets are distributed to non-charitable entities, usually the Grantor’s children. 
  9. Intentionally Defective Grantor Trust:  involves “freezing” specific assets for estate tax purposes but not for income tax purposes.  That is, it allows a Grantor to transfer assets out of his estate in order to avoid estate taxes; however, the transfer is intentionally defective as to income taxes.  The Grantor pays the income tax on any income generated by the assets in the trust, but any asset appreciation is excluded from the Grantor’s estate.  This is a great way to handle assets that are appreciating quickly like stock or real estate. 
  10. Irrevocable Life Insurance Trust is a trust that this funded during your lifetime with one or more life insurance policies.  Upon your death, the policies pay your loved ones and avoid estate and income taxation. 
  11. Qualified Personal Residence Trust is an irrevocable trust for your home.  It will remove the home from your estate (for estate tax purposes) and helps transfer the property to a beneficiary (typically children) while avoiding probate.
  12.  Qualified Terminable Interest Property Trust allows the Grantor to provide for a surviving spouse but maintain control over how the assets are distributed once the surviving spouse dies. 

Where can I get Help Understanding Which Trust is Best for Me?

Contact the Law Office of Jonathan Alexander for counsel and guidance regarding which irrevocable trust and plan design will best fit your needs.  Call us today at (949) 334-7823.  Mr. Alexander has 20 years’ experience and can help you create a plan that avoids unnecessary taxation, provides protection for you in the event of incapacity, and that allows to create a legacy for sustains your family for generations to come. 

For more information about Mr. Alexander, his practice, and his estate planning philosophy please read his bio linked here.

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