An irrevocable trust is a type of trust where its terms cannot be modified, amended or terminated without the permission of the grantor's named beneficiary or beneficiaries. The grantor, having effectively transferred all ownership of assets into the trust, legally removes all of their rights of ownership to the assets and the trust.
This is in contrast to a revocable trust, which allows the grantor to modify the trust, but loses some benefits such as creditor protection.
The main reason for setting up an irrevocable trust is for tax considerations. The benefit of this type of trust 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.
Irrevocable Trusts vs. Revocable Trusts
Revocable living trusts are more common, since it gives the creator more control. Revocable trusts may be amended or canceled at any time as long as their creator is mentally competent. They do offer the benefit of allowing their creator to cancel them and reclaim property held by the trust at any time before death. However, such trusts do not offer the same protection against legal action or estate taxes as irrevocable trusts.
|FEATURE||REVOCABLE TRUST||IRREVOCABLE TRUST|
|Remove or retitle assets||Yes||No|
|Protection from creditors||No||Yes|
|Tax shelter (estate tax, capital gains tax)||No||Yes|
Should you get an irrevocable trust?
Irrevocable trusts are difficult to change. Reasons you might benefit from an irrevocable trust are:
- You're very wealthy and want to reduce your taxable estate
- If you have a disabled dependent
- You have are likely to be sued and need asset protection