Irrevocable Trust
An irrevocable trust cannot be modified, amended, or terminated by the grantor once executed, except under narrow judicial doctrines or state decanting statutes.
Key features of an irrevocable trust:
- Estate Exclusion
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Assets transferred to the trust are removed from the grantor’s gross estate for estate tax purposes (governed by IRC §2036 and IRC §2038), provided the grantor retains no beneficial interest or control.
- Asset Protection
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Assets are shielded from the beneficiaries’ creditors, because a beneficiary owns nothing but a discretionary expectancy. Protection from the grantor’s creditors depends entirely on whether the grantor is also a beneficiary. Give the property away for real and it is beyond your creditors’ reach; keep yourself on the beneficiary list and, outside the DAPT states, your creditors step into your shoes and reach whatever the trustee could hand you (section “Domestic Asset Protection Trusts (DAPTs)”). Neither version defeats a transfer made after the claim arose—that is a voidable transfer in every state.
- Taxation
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If structured as a non-grantor trust, the trust is a separate tax entity filing Form 1041, subject to the compressed fiduciary brackets that make retaining income expensive (section “Trust Accounting and Fiduciary Taxation”).
Common irrevocable trust structures include:
- Irrevocable Life Insurance Trust (ILITs): Holds life insurance policies to exclude the death benefit from the grantor’s taxable estate under IRC §2042.
- Grantor Retained Annuity Trust (GRATs): Transfers high-appreciation assets to heirs with minimal gift tax exposure under IRC §2702.
- Charitable Remainder Trust (CRTs): Provides income to a non-charitable beneficiary, with the remainder passing to charity under IRC §664.
- Special Needs Trust (SNT): Preserves eligibility for government benefits (such as Medicaid and SSI) for a disabled beneficiary. A third-party SNT—the one you build into your own estate plan—rests on common law and carries no Medicaid payback; the first-party version, funded with the beneficiary’s own money, is the one authorized by 42 U.S.C. §1396p(d)(4)(A) and does (section “Special Needs Trusts”).