Irrevocable Trusts: When Are They a Good Idea?

An irrevocable trust can maintain your wishes after you die, but it will cost you some flexibility. While a last will and testament require a probate court process to distribute your assets to heirs, most trusts avoid probate. However, your lifestyle and personal preferences will dictate whether an irrevocable trust or a revocable trust is best suited to your needs.

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What Is an Irrevocable Trust?

True to its name, an irrevocable trust is just that: Irrevocable. The person who creates the trust – the grantor – can’t make changes to it. Only a beneficiary can make and approve changes to it once it’s been created. Once you transfer ownership into the trust, you don’t have control over those assets anymore. With a revocable trust, the grantor retains all rights to change or even terminate the trust.

Revocable living trusts are more common since they give the creator more control. If you experience major life changes, like selling a house that was your trust, you may want to make updates yourself. But there might be instances when an irrevocable trust is a better move.

Types of Irrevocable Trusts

There are several available options that qualify as irrevocable trusts, each with its own distinct purposes. Here’s a breakdown of them:

1. Irrevocable Life Insurance Trust

An irrevocable life insurance trust, for example, is a trust designated as the beneficiary of your life insurance policy. When you die, proceeds are paid into the trust before a trustee manages them for your beneficiaries. An irrevocable life insurance trust may be worth considering if you want to avoid estate taxes on large life insurance payouts.

2. Irrevocable Marital Trust

A bypass trust, or marital trust, transfers assets from one spouse to another at the time of the first spouse’s death. The surviving spouse has a trustee managing those assets, which keeps them outside of the estate.

The surviving spouse can receive income from the trust as well as the principal if the grantor gives either the trustee or the surviving spouse the power to do so. That said, the grantor may limit the withdrawal to a set amount. When the surviving spouse dies, the remaining assets go to beneficiaries, free of the estate tax.

3. Irrevocable Charitable Trust

There are also two irrevocable charitable trusts to choose from: A charitable lead trust and a charitable remainder trust. The first allows you to yield certain assets to charitable organizations, with the rest of your assets going to your beneficiaries when you pass away.

A charitable remainder trust allows you to receive income from your assets for a set period. Any remaining assets or income go to a charity of your choice. However, since it’s an irrevocable trust, you can’t change the payout amount even if your needs change.

When Is an Irrevocable Trust a Good Idea?

If you’re creating a trust, you may have specific assets that would benefit from an irrevocable trust. Many people set up this type of trust for estate and tax purposes. Since you’re rescinding ownership of certain assets – as they’re now in the trust – you’re no longer liable for estate tax. If a home in the trust produces income, you’re not required to pay the taxes on that, either. Simply put, it’s a way to save money on your tax bill.

An irrevocable trust may also limit your estate’s vulnerability to creditors. If you die in debt, your assets can be sold off to creditors to pay them off. If you want to pass along your estate to your heirs, like your children, an irrevocable trust might help. You’ll no longer own the estate – the trust does – which means it’s safe from creditors and legal judgments.

One important note: irrevocable trusts are not only for the very wealthy. Many types of people with many different financial situations can benefit from using an irrevocable trust.

Irrevocable Trusts vs. Revocable Trusts

The polar opposite of irrevocable trust is a revocable trust. As its name delineates, revocable trusts allow the owner of the trust to make changes to its contents at any time, without the consent of its beneficiaries. Other areas of a revocable trust can also be changed, including new beneficiaries and management preferences. An irrevocable trust, on the other hand, requires the signatures of its beneficiaries before changes can be completed.

On the flip side, because a revocable trust is still under the owner’s name, the assets within it are not under protection from creditors. This is a major perk of an irrevocable trust, as it protects your assets under all circumstances. The assets in a revocable trust are also not exempt from federal and state estate taxes.

Bottom Line

If you’re on the hunt for setting up your afterlife affairs, you have a few options, including trusts. There are many different types of trusts and the one you pick depends on your situation. Regardless of what you choose, it’s best to talk to a professional. Seek help from an estate lawyer or another expert to help you navigate your assets, affairs and how you want them handled once you pass. Having any plan at all not only helps your heirs handle your things but also gives you control over your plans.

Tips for Estate Planning

Although an estate planning attorney is a worthwhile resource for anyone putting together their estate, a financial advisor can take a particularly holistic look at your finances. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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