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What is an 'Irrevocable Trust'

An irrevocable trust can't be modified or terminated without the beneficiary's permission. 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 reasons for setting up an irrevocable trust are 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. It also relieves the grantor of the tax liability on the income the assets generate. 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 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, a trustee and a beneficiary or beneficiaries. Once the grantor places an asset in an irrevocable trust, it is a gift to the trust and the grantor cannot revoke it. 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 beneficiaries from misusing assets, as the grantor can set conditions for distribution.

• To gift assets 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 when using an irrevocable trust, seek a tax or estate attorney's guidance.

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