What is an irrevocable trust? It is important to know when to use an irrevocable trust as part of your estate plan. What is the difference between an irrevocable trust and a revocable trust?
Key Takeaways of When to Use an Irrevocable Trust in Your Estate Plan:
- An irrevocable trust is a legal entity that allows the one who establishes the trust (grantor) to transfer specific assets to a trust managed by a trustee who is responsible for managing those assets on behalf of the beneficiaries of that trust.
- Once an irrevocable trust is established and funded (the assets are transferred into the trust), the assets cannot be retrieved, and the grantor cannot change the terms of the trust.
- There are specific uses for an irrevocable trust, such as to minimize taxes, shield assets from creditors, provide for beneficiaries who may be minors or have special needs, and make charitable contributions.
- Prudence and sound counsel are required in these cases, as an irrevocable trust, by its very design, removes the grantor's control of the assets contained within that trust.
What is the Difference Between a Revocable Trust and an Irrevocable Trust?
Generally speaking, a revocable trust (often called a living trust or will) is a legal entity that is separate from the one(s) who contribute assets (fund) the trust itself, known as the "grantors." The nature of a revocable trust is the ability of the grantor to make changes or revoke the terms of the trust altogether at any time. The grantor can change the terms of the trust, its beneficiaries, the trustee (the person responsible for managing the assets within a trust), or revoke the trust and its assets altogether. There are specific advantages and disadvantages for a revocable trust based upon the perspective of taxation, probate, and a creditor's ability to make a claim against the assets within a revocable trust.
An irrevocable trust is a legal entity that allows the one who establishes the trust (grantor) to transfer specific assets to an entity (the irrevocable trust) that is managed by a trustee who is responsible for managing those assets on behalf of the beneficiaries of that trust. This allows one to shield assets from creditors while reducing one's estate and lowering associated estate taxation. However, once an irrevocable trust is established, it cannot be changed or ended without an order of the court and permission of the beneficiaries of that trust.
It is prudent to consult with an experienced estate planning and tax attorney to know when to use an irrevocable trust in your estate plan. Estate taxes may be at an all-time relative low. However, estate planning remains an essential consideration for all citizens, particularly for Californians who own a home.
There are Many Strategies to Pass Money and Assets to a Beneficiary
Many strategies allow an individual or married couple to pass assets to an individual or group of beneficiaries during their lifetime, or after their passing. One way to pass money (or an asset with a monetary value) is to simply "gift" it to the recipient. The IRS annual gift tax exclusion for 2025 is $19,000, per person, for each recipient. Therefore, a husband and wife could each give $19,000 this year to a single child, tax-free. U.S. taxpayers may give that amount (the annual gift tax exclusion) to as many individuals as desired.
In this example, each parent could gift $19,000 (or whatever the IRS annual gift tax exclusion is for that tax year) to each beneficiary of their choosing each year, tax-free. However, what should you do if you hold concerns about the prudence, experience, or wisdom of the recipient to manage that money effectively?
The Advantages of a Well-Conceived Estate Plan
Estate planning in general, and trust planning specifically, allows your assets to pass directly to beneficiaries quickly and with minimum expense. Part of the strategic design of any effective estate plan is knowing when to use a revocable trust and/or an irrevocable trust within your estate planning strategy. The main advantage of any estate plan is that it protects your existing assets and reduces tax liability, while providing the opportunity to set aside money for children, grandchildren, and other beneficiaries, gain immediate tax advantages, and provide for the future while expanding the overall amount of wealth that is passed from one generation to the next tax-free.
Creating a trust moves an asset from one's "person" to another owner - in most estate plans, this is some form of a trust. We've learned that in a revocable trust, assets can be moved in and out of the trust at will by the grantor (the person who establishes the trust).
Irrevocable trusts may provide additional tax benefits to the grantor to assist with many situations, such as:
- Providing for the lifetime needs of a disabled or special needs child
- Preparing for retirement or long-term medical care (spend down strategies)
- Protecting beneficiaries from losing inheritance or assets in a contested or acrimonious divorce
- Ensuring college tuition for children and/or grandchildren
- Providing for a beloved pet
It is important to know when to use an irrevocable trust as part of your estate plan. Each estate plan is as unique as the grantor(s). However, the skill and experience of your tax attorney and estate planning attorney can make a profound difference on the quality of the protections and minimization of tax exposure(s) you achieve, the money you save now and for the rest of your lifetime, the time and expense of transferring assets to beneficiaries at the time of your passing, and taxation at every step of the journey.
Do you know when to use an irrevocable trust as part of your estate plan strategy in San Diego and throughout California? Placing assets into an irrevocable trust can be an essential ingredient of a well-conceived and executed estate plan. Protect your wealth and pass it on according to your intentions.
