Loading the player...

What is an 'Irrevocable Trust'

An irrevocable trust can't be modified or terminated without the permission of the beneficiary. The grantor, having transferred assets into the trust, effectively removes all of his rights of ownership to the assets and the trust. This is the opposite of a revocable trust, which allows the grantor to modify the trust.

BREAKING DOWN 'Irrevocable Trust'

The main reason for setting up an irrevocable trust is for estate and tax considerations. The benefit of this type of trust for estate assets is that it removes all incidents of ownership, effectively removing the trust's assets from the grantor's taxable estate. The grantor is also relieved of the tax liability on the income generated by the assets. While the tax rules vary between jurisdictions, in most cases, the grantor can't receive these benefits if he is the trustee of the trust. The assets held in the trust can include, but are not limited to, a business, investment assets, cash and life insurance policies.

For more on Irrevocable trusts (and other types of trusts), check out How to Set up a Trust Fund or the Estate Planning Tutorial.

Irrevocable Trust Basics

An irrevocable trust has a grantor (the person who grants or gifts the assets), a trustee and a beneficiary. Once the grantor places an asset is inside an irrevocable trust, it is considered a gift to the trust and cannot be revoked. The grantor can dictate the terms, rules and uses of the trust assets with the consent of the trustee and the beneficiary.

Irrevocable trusts can have many applications in planning for the preservation and distribution of an estate, including:

• To take advantage of the estate tax exemption and remove taxable assets from the estate

• To prevent assets from being misused by beneficiaries; assets can be held in trust and distributed with conditions

• To be able to gift assets or remove them from the estate while still retaining the income from the assets

• To remove appreciable assets from the estate while still providing beneficiaries with a step-up basis in valuing the assets for tax purposes

• To gift a principal residence to children under more favorable tax rules

• To house a life insurance policy that would effectively remove the death proceeds from the estate

An irrevocable trust is a more complex legal arrangement than a revocable trust. Because there could be current income tax and future estate tax implications in the use of an irrevocable trust, seek the guidance of a tax or estate attorney.

RELATED TERMS
  1. Grantor Trust Rules

    Guidelines that state a trust is considered to be a grantor trust ...
  2. Revocable Trust

    A trust whereby provisions can be altered or canceled dependent ...
  3. Grantor Retained Annuity Trust ...

    An estate planning technique that minimizes the tax liability ...
  4. Irrevocable Income-Only Trust - ...

    A type of living trust often used for Medicaid planning. It protects ...
  5. Insurance Trust

    An irrevocable trust set up with a life insurance policy as the ...
  6. Incentive Trust

    A legally binding fiduciary relationship in which the trustee ...
Related Articles
  1. Managing Wealth

    Pick The Perfect Trust

    Trusts are an estate plan's anchor, but the terminology can be confusing. We cut through the clutter.
  2. Financial Advisor

    Irrevocable Trusts: New Trends You Need to Know

    Several improvements and additional provisions have been added to irrevocable trusts in recent years making them considerably more versatile than before.
  3. Financial Advisor

    When to Trust a Revocable Trust

    Unsure of how your assets will be dispersed once you're gone? Here's how setting up a revocable trust while you're here can be a big benefit.
  4. Financial Advisor

    Advisors: Tips for When to Employ Living Trusts

    Revocable living trusts accomplish estate planning objectives that aren't possible with a will. Here are some of the cases that show when to use a trust.
  5. Managing Wealth

    Understanding Revocable Trusts

    A revocable trust is a legal arrangement whereby a grantor transfers property to a trustee who holds the property in trust for the grantor’s benefit.
  6. Managing Wealth

    How To Set Up A Trust Fund If You’re Not Rich

    Contrary to popular opinion, trust funds are not just for the rich. Middle class citizens can set them up, as well.
  7. Managing Wealth

    What's an Irrevocable Trust?

    In an irrevocable trust, the grantor gives up the right to revise, amend or terminate the trust without the permission of the beneficiary. An irrevocable trust is best used as an estate-planning ...
  8. Investing

    A Look Into Creating a Trust Fund With ETFs (VCIT, SDIV)

    Learn the basics of how a trust works and the two most common types. Discover how to use ETFs to fund a trust and the different strategies.
  9. Managing Wealth

    Surprising Ways a Trust Could Help Your Family

    Everything you always wanted to know about setting up trusts, in handy glossary form.
  10. Taxes

    Tax-Efficient Wealth Transfer

    Taxpayers with large taxable estates were required to take steps to reduce them before 2011.
RELATED FAQS
  1. What is the difference between a revocable trust and an irrevocable trust?

    Find out more about irrevocable trusts, revocable trusts and the main differences between them. Read Answer >>
  2. Can trust funds be activated before the grantor intended?

    Trust law gives the grantor specific rights over the release of assets and therefore it is not possible to change the stipulations ... Read Answer >>
  3. How does the trust maker transfer funds into a revocable trust?

    Learn how revocable living trusts are established, how the trust maker transfers funds into the trust, and the advantages ... Read Answer >>
  4. What are the differences between a revocable trust and a will?

    Investigate the choice between a revocable trust and a traditional will and how their unique advantages can match asset management ... Read Answer >>
  5. What is the difference between a revocable trust and a living trust?

    Learn how a revocable trust and living trust are two terms used to describe the same thing and what the key provisions are ... Read Answer >>
Hot Definitions
  1. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  2. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  3. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  4. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  5. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  6. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
Trading Center