Irrevocable Trust: What Is It & How Does It Work? | MetLife (2024)

An irrevocable trust is a type of trust typically created to help protect assets and reduce federal estate taxes. The creator of the trust (the grantor) can designate assets of their choosing to transfer over to a recipient (thebeneficiary).

Once established, irrevocable trusts are very difficult to change or dissolve. The grantor forfeits ownership and authority over the trust and its assets, meaning they’re unable to make any changes without permission from the beneficiary or a court order. A third-party member, called a trustee, is responsible for managing and overseeing an irrevocable trust.

Why set up an irrevocable trust?

Assets held in an irrevocable trust generally become exempt from the grantor’s taxable estate. This in turn decreases the grantor’s tax liability, particularly if they have a large estate.

Irrevocable trusts can also avoid probate and are private, meaning the public is not privy to their terms or to the assets held within them.

Types of irrevocable trusts

Irrevocable trusts come in two forms: a living trust, which is established while the grantor is alive, or a testamentary trust, which is established after the grantor’s death based on their will. There are different kinds of irrevocable trusts you can establish to suit your specific situation, including:

Charitable trusts

You can establish charitable trusts to transfer assets or funds to a charitable organization. With a charitable remainder trust, a grantor can initially transfer assets to a beneficiary, and then subsequently disperse the remainder of the assets go to a charity. This trust also enables the grantor to take a partial income tax deduction for funding the trust. A charitable lead trust works in the reverse — you transfer assets to an organization and the remainder goes to a final beneficiary.

Irrevocable life insurance trusts (ILIT)

This trust offers allows a beneficiary to own a life insurance policy during the insured individual’s life. Following the insured's death, the trust oversees and distributes the proceeds of the policy to the beneficiary.

GRATs and QPRTs

You can establish grantor-retained annuity trusts (GRATs) and qualified personal residence trusts (QPRTs) to help minimize taxes on gifts to beneficiaries. Money and property can be placed in the trust with a set time for when the trust terminates. If the grantor is still alive when the trust terms end, the money and property pass to the beneficiaries without incurring estate taxes. If the grantor dies before the trust terms end, the trust assets are typically included in estate taxes.

Spendthrift trusts

Spendthrift trusts limit a beneficiary’s access to the trust’s assets or funds. They can be beneficial for beneficiaries who may not be able to properly manage money or property yet.

Special needs trusts

Special needs trusts can be set up to provide financial support to individuals with disabilities — without affecting their ability to qualify for government benefits. 

What happens to an irrevocable trust when the grantor dies?

When a grantor dies, assets to beneficiaries are typically distributed to the beneficiary according to the terms of the trust. Usually, the trust will dissolve once the assets have been fully distributed.There’s one notable exception for retirement accounts that are set up to pass to a beneficiary through a trust. Changes made under the Setting Every Community Up for Retirement Enhancement (SECURE) Act now require some non-spousal beneficiaries to take all their distributions within 10 years after the year of the grantor’s death, instead of doing so over the course of their life.¹

The differences between a revocable and an irrevocable trust

The big difference between revocable and irrevocable trusts amounts to the degree of flexibility each one offers. Unlike irrevocable trusts, revocable trusts allow the grantor to alter or dissolve the trust at their discretion (contingent upon their mental competency).

Prior to their death, the grantor of a revocable trust may also reclaim the property and assets within their trust. But upon their death, the revocable trust automatically becomes irrevocable. Finally, any assets or property transferred into a revocable trust are not protected from estate taxes or legal actions.

Can an irrevocable trust be changed?

It may sound like the terms of an irrevocable trust are ironclad, but there are instances when you may be able to make changes. Through court orders or a process called “decanting,” it’s possible to pass assets from an already established trust to a new trust with different provisions.^.2

Additionally, depending on the state, there are certain circ*mstances that could allow the trustee and the beneficiary to make changes to an irrevocable trust. For example, the trustee might allow the beneficiary early access to the assets due to the onset of a life-threatening illness.

A third party can also justifiably overturn your trust. If you establish an irrevocable trust while there’s an active lawsuit against you, or during a period of time when you’re anticipating an impending lawsuit, a court may successfully overturn the trust. Basically, it’s not permitted to preemptively establish an irrevocable trust to protect your assets from a specific party.