Irrevocable Trusts: What They Are and When to Use Them

An irrevocable trust is a legal arrangement that permanently transfers assets out of the grantor’s control, offering potential benefits like estate tax reduction, asset protection and Medicaid planning. While a last will and testament requires probate to distribute your assets to your heirs, irrevocable trusts avoid probate and preserve the privacy of an estate. Once created, its terms generally cannot be altered, making it distinct from a revocable trust. Ultimately, your finances and personal preferences will dictate whether an irrevocable trust or a revocable trust best suits your needs.

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What Is an Irrevocable Trust?

An irrevocable trust is a legal entity that holds assets for beneficiaries under terms that generally cannot be changed by the grantor. Unlike a revocable trust, it removes ownership rights, transferring control to a trustee. This structure helps protect assets from legal judgments and reduces estate tax liability by removing them from the grantor’s taxable estate.

Commonly used in estate planning, irrevocable trusts can protect wealth, manage inheritances and secure financial stability. They also serve specific purposes, such as charitable giving or qualifying for Medicaid benefits.

While difficult to alter, modifications or terminations may be possible under certain conditions. Some trusts allow amendments with beneficiary consent or court approval. Trust decanting in some jurisdictions enables the transfer of assets into a new trust with updated terms. Courts may also permit changes if they align with the trust’s original intent and all beneficiaries agree.

Types of Irrevocable Trusts

There are several types of trusts that qualify as irrevocable trusts, each serving a distinct purpose.

1. Irrevocable Life Insurance Trust

An irrevocable life insurance trust is a trust designated as the beneficiary of your life insurance policy. The proceeds are paid into the trust upon death, and 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 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. This is why it is sometimes called a marital trust.

The surviving spouse can receive income from the trust, as well as the principal, if the grantor gives the trustee or surviving spouse the power to do so. However, the grantor may limit withdrawals to a set amount.

When the surviving spouse dies, the remaining assets pass to beneficiaries, free of 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.

Charitable lead trust. A charitable lead trust first allows you to transfer certain assets to charitable organizations, with the remainder of your assets going to your beneficiaries upon your death.
Charitable remainder trust. A charitable remainder trust allows you to receive income from your assets for a specified 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.

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When Is an Irrevocable Trust a Good Idea?

A husband and wife reviewing options for an irrevocable trust.

You might consider an irrevocable trust if you have specific assets that would benefit from one.

Many people set up this type of trust for estate and tax purposes. Because you rescind ownership of certain assets to the trust, you’re no longer liable for estate tax. If a home in the trust produces income, you’re not required to pay taxes on that, either. Simply put, it’s a way to avoid tax liability.

An irrevocable trust may also limit your estate’s vulnerability to creditors. If you die in debt, your assets can be sold to creditors for payment. If you want to pass your estate to your heirs, like your children, an irrevocable trust may help. You’ll no longer own the estate, as the trust now will. This means it will be protected from creditors and legal judgments.

Another key advantage is avoiding probate, the legal process of settling an estate. Probate can be time-consuming, costly and subject to public record, which may not align with your privacy preferences. Assets placed in an irrevocable trust avoid probate entirely, ensuring a smoother and quicker transfer of wealth to beneficiaries.

One important note: irrevocable trusts are not only for high-net-worth individuals. Many types of people in various financial situations can benefit from using an irrevocable trust.

Irrevocable Trusts vs. Revocable Trusts

A revocable trust allows the owner to make changes at any time without beneficiary consent. Other areas of a revocable trust can also be changed, including adding new beneficiaries and updating 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 protected 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.

Limits and Tradeoffs to Consider With Irrevocable Trusts

Placing assets into an irrevocable trust means permanently giving up personal ownership.

Once the transfer is complete, the grantor no longer has direct access to those assets or authority over their use. This structure can restrict flexibility later in life, particularly if financial needs change due to health costs, income disruption or family circumstances that were not anticipated when the trust was created.

Irrevocable trusts also introduce administrative complexity. Because the trust exists as a separate legal entity, it must be managed by a trustee who follows the trust terms and applicable state law. This often involves ongoing recordkeeping, separate tax filings and potential trustee compensation. These requirements can increase costs compared with arrangements where assets remain under personal control.

Tax outcomes require close attention. While removing assets from an estate can reduce estate tax exposure, irrevocable trusts often face higher income tax rates on retained earnings. Distributing income to beneficiaries can shift the tax burden, but overall liability depends on the timing of your distributions and the design of the trust. The tax impact may vary year to year, differing from individual tax treatment.

Coordination with the broader estate plan matters, as well. Assets transferred into an irrevocable trust no longer pass through a will or revocable trust, which can create inconsistencies if beneficiary designations or ownership structures are not aligned.

Because changes are limited after the trust is funded, discrepancies between documents can persist over time and complicate how assets ultimately pass to heirs.

Bottom Line

You might consider an irrevocable trust if you have specific assets that would benefit from one.

If you’re working on setting up your afterlife affairs, you have a few options involving 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 financial advisor to navigate your assets, affairs and how you want them handled once you pass. Having a plan helps your heirs manage your estate and gives you control over your legacy.

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 holistic look at your finances. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with 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.
Estate planning can be a challenge, and bad decisions can be costly. To help, take a look at SmartAsset’s guide on the five estate planning mistakes you can’t afford to make.