Irrevocable trust refers to any trust where the grantor cannot change or end the trust after its creation. Grantors may choose a trust with such limitations to limit estate taxes or to shield assets from creditors. When someone creates a trust, states generally have an assumption as to the revocability of trusts with some states like New York assuming they are not revocable or states like California assuming they are revocable. So, it is important to use the exact words in the trust document expected in the state to create an irrevocable trust.
Irrevocable trusts come in handy in different circ*mstances for individuals even though they cannot be changed. For example, many put assets into an irrevocable trust because the assets may avoid estate taxes that otherwise would apply. In this situation, it is imperative that the grantor pay the income taxes for the trust without the trust reimbursing for the taxes as this can void the tax benefits. Another important use of irrevocable trusts involves putting assets into a trust because creditors cannot get them in a lawsuit like they can with revocable trusts, and this can prevent either the grantor or beneficiaries’ creditors from access. Further, irrevocable trusts allow grantors to allow a trustee to manage and distribute assets according to a set of guidelines over time that a will may not allow.
Just like with ensuring the words “irrevocable trust” are used, states and federal rules have very specific requirements to gain the advantages of an irrevocable trust, and therefore, a local specialist for trusts should be consulted in creating an irrevocable trust.
[Last updated in March of 2022 by the Wex Definitions Team]
