An irrevocable trust is a trust that, once established and funded, cannot be altered, amended, or revoked by the grantor without the consent of the beneficiaries (and often requires court approval). Assets transferred to an irrevocable trust are generally removed from the grantor's taxable estate.
Key advantages: - Estate tax reduction: Assets in the trust are no longer in the grantor's estate (assuming the grantor retains no control or benefits). - Asset protection: Many irrevocable trusts protect assets from creditors. - Medicaid planning: Assets in some irrevocable trusts may be protected from Medicaid spend-down requirements (with a 5-year look-back period).
Common types of irrevocable trusts:
| Trust | Purpose | |---|---| | Irrevocable Life Insurance Trust (ILIT) | Keeps life insurance proceeds out of the taxable estate | | Charitable Remainder Trust (CRT) | Income to grantor/spouse, remainder to charity; immediate charitable deduction | | Charitable Lead Trust (CLT) | Income to charity, remainder to heirs | | Special Needs Trust (SNT) | Provides for a disabled beneficiary without affecting government benefits | | Spousal Lifetime Access Trust (SLAT) | Assets in trust for spouse's benefit, out of grantor's estate | | GRAT (Grantor Retained Annuity Trust) | Transfers appreciation to heirs with minimal gift tax | | QPRT (Qualified Personal Residence Trust) | Removes primary residence from estate at a discount |
Tax treatment: Grantor trusts are taxed to the grantor despite being irrevocable; non-grantor trusts are taxed at the trust's own (compressed) tax rates.
> Exam tip: Irrevocable = cannot take assets back → out of estate → estate tax reduction. Revocable = can take assets back → still in estate. ILITs are a classic exam topic for keeping life insurance proceeds estate-tax-free.