Irrevocable Trust FAQs: Everything You Need to Know

An irrevocable trust is a crucial estate planning tool that offers asset protection, tax benefits, and long-term financial security for your beneficiaries. However, once established, it cannot be easily changed or revoked. Understanding how irrevocable trusts work is essential to determine if they fit your estate planning needs.

If you need assistance with setting up or managing an irrevocable trust, contact us by using our online form or calling 414-253-8500 for legal guidance.

What Is an Irrevocable Trust?

An irrevocable trust is a legal entity that holds assets on behalf of beneficiaries, and its terms cannot be modified or terminated without the approval of the beneficiaries or a court order. Once assets are placed into an irrevocable trust, they are no longer considered part of the grantor's estate, providing benefits such as asset protection and tax advantages.

Key Features of an Irrevocable Trust:

Loss of Control - The grantor gives up ownership and control over the assets.
Creditor Protection - Assets in the trust are shielded from lawsuits and creditors.
Estate Tax Reduction - Assets transferred to the trust are removed from the taxable estate.
Preserved Government Benefits - Beneficiaries receiving Medicaid or disability benefits can remain eligible.

Pros and Cons of an Irrevocable Trust

Aspect	Advantages	Disadvantages
Asset Protection	Shields assets from creditors and lawsuits	Grantor loses direct control over assets
Estate Tax Benefits	Removes assets from taxable estate	Cannot easily retrieve or modify assets
Probate Avoidance	Assets bypass probate for faster distribution	Requires legal assistance to set up properly
Government Benefits	Helps beneficiaries maintain Medicaid or SSI	Assets must be transferred well in advance
Control Over Distribution	Ensures assets are distributed according to grantor's wishes	Grantor cannot make future changes to terms

Types of Irrevocable Trusts

Different types of irrevocable trusts serve unique purposes. Choosing the right trust depends on your estate planning goals.

1. Irrevocable Life Insurance Trust (ILIT)

An ILIT removes life insurance proceeds from your taxable estate, ensuring that your beneficiaries receive the full death benefit without estate tax liability.

2. Medicaid Asset Protection Trust (MAPT)

A MAPT helps individuals qualify for Medicaid while preserving assets for heirs. Assets in this trust are not counted toward Medicaid eligibility calculations.

3. Charitable Remainder Trust (CRT)

A CRT allows you to donate assets to charity while receiving income for life or a set term. It provides tax deductions and can benefit both the donor and charitable organizations.

4. Special Needs Trust (SNT)

An SNT ensures that a disabled beneficiary receives financial support without losing eligibility for government assistance programs like Medicaid and SSI.

For more details on specific trust types, visit our irrevocable trusts page.

How Does an Irrevocable Trust Work?

Once created, an irrevocable trust follows these steps:

Grantor Establishes the Trust - The individual creating the trust (grantor) works with an attorney to draft a trust agreement.
Trustee Manages the Trust - The grantor appoints a trustee, who is responsible for managing trust assets according to the trust terms.
Assets Are Transferred - The grantor funds the trust by transferring assets such as real estate, cash, or investments.
Trustee Distributes Assets - The trustee manages and distributes trust assets to the beneficiaries based on the trust's guidelines.

Key Benefits of an Irrevocable Trust

Avoids Probate - Assets in the trust bypass the probate process, allowing for faster and private distribution.
Protects Against Lawsuits - Assets in an irrevocable trust are safeguarded from potential legal claims.
Tax Advantages - Reduces estate taxes and provides potential income tax benefits.

Can an Irrevocable Trust Be Changed or Terminated?

Generally, irrevocable trusts cannot be changed or revoked once established. However, in certain situations, modifications may be possible through legal mechanisms such as:

Trust Protector Provisions - Some irrevocable trusts include a trust protector, an independent party with limited authority to amend trust terms under specific conditions.
Decanting the Trust - Some states allow trust decanting, which involves transferring assets from an old trust into a new trust with updated provisions.
Court Petition - A court may allow modifications if all beneficiaries agree and the changes align with the original intent of the trust.
Agreement of Beneficiaries - If all beneficiaries consent, some changes may be made, depending on state law.

Situations That May Require Changes

Changes in tax law affecting estate planning strategies.
Family circumstances such as the death of a beneficiary or trustee.
Unintended consequences of the original trust terms.

Since modifying an irrevocable trust is complex, consulting with an estate planning attorney is critical.

Who Should Consider an Irrevocable Trust?

An irrevocable trust may be a good option if you:

Have significant assets and want to reduce estate tax liability.
Own life insurance policies and want to protect the proceeds from taxation.
Want to protect assets from creditors or lawsuits.
Have a loved one with special needs who relies on government benefits.
Are planning for Medicaid eligibility while preserving family wealth.

If you are unsure whether an irrevocable trust is right for you, a legal consultation can help evaluate your options.

Irrevocable Trust vs. Revocable Trust

A revocable trust and an irrevocable trust serve different purposes in estate planning. Below is a comparison:

Feature	Irrevocable Trust	Revocable Trust
Control	Cannot be altered or revoked after creation	Can be modified or revoked by the grantor
Asset Protection	Shields assets from creditors and lawsuits	Does not offer asset protection
Estate Tax Benefits	Removes assets from taxable estate	Assets remain in the grantor's estate
Probate Avoidance	Avoids probate	Avoids probate
Medicaid Planning	Helps qualify for Medicaid	Assets may still be counted for Medicaid

For those who need flexibility, a revocable trust may be a better option. However, for long-term asset protection, an irrevocable trust is often the preferred choice.

What Assets Can Be Placed in an Irrevocable Trust?

Many types of assets can be transferred into an irrevocable trust, including:

Real Estate - Homes, rental properties, and vacation homes.
Investments - Stocks, bonds, and mutual funds.
Business Interests - Ownership shares in a company.
Life Insurance Policies - When placed in an Irrevocable Life Insurance Trust (ILIT), proceeds can be excluded from estate taxes.
Cash and Bank Accounts - Large cash reserves can be transferred for asset protection.

However, once transferred, the grantor no longer owns or controls these assets. Careful planning is essential before making transfers.

How to Set Up an Irrevocable Trust

Establishing an irrevocable trust requires careful planning and legal assistance. The process typically involves:

Consulting an Attorney - Work with an estate planning attorney to determine if an irrevocable trust fits your needs.
Drafting the Trust Agreement - An attorney will draft the legal document outlining the terms, trustee responsibilities, and beneficiary designations.
Selecting a Trustee - Choose a responsible individual or institution to manage the trust.
Funding the Trust - Transfer assets into the trust, ensuring they are properly titled.
Executing the Trust Document - The document is signed and legally recorded.

Once funded, the trust is operational, and the grantor loses direct control over the assets.

Key Roles in an Irrevocable Trust

Role	Responsibilities
Grantor	Creates the trust and transfers assets into it.
Trustee	Manages trust assets and distributes them per the trust's terms.
Beneficiary	Receives assets or income from the trust.
Trust Protector	(If applicable) Has limited authority to modify the trust.
Attorney	Drafts trust documents and provides legal guidance.

Contact an Estate Planning Attorney for Irrevocable Trust Guidance

An irrevocable trust is a powerful estate planning tool, but it requires careful legal structuring to align with your financial goals. Whether you're looking for asset protection, tax benefits, or Medicaid planning, a well-structured trust can provide significant advantages.

To explore your options, contact our estate planning attorneys today by calling 414-253-8500 or using our online contact form.

Frequently Asked Questions (FAQs)

1. What is the main purpose of an irrevocable trust?

An irrevocable trust is primarily used for asset protection, estate tax reduction, and financial planning. It helps protect assets from creditors and lawsuits, removes assets from the taxable estate, and can preserve eligibility for government benefits like Medicaid.

2. Can you withdraw money from an irrevocable trust?

No, the grantor cannot withdraw assets from an irrevocable trust after they have been transferred. Only the trustee has the authority to distribute funds according to the trust terms. However, beneficiaries may receive distributions based on the trust agreement.

3. What happens to an irrevocable trust after the grantor dies?

After the grantor's death, the trust continues to function based on its terms. The trustee manages and distributes assets to the beneficiaries as directed. If the trust was created for asset protection or tax planning, it may continue for multiple generations.

4. Are irrevocable trusts subject to income taxes?

Yes, irrevocable trusts are considered separate legal entities and must file their own tax returns. The trust may be responsible for paying income taxes on retained earnings, while distributed income is taxed at the beneficiary's rate. Proper tax planning is essential when creating an irrevocable trust.

5. How long does an irrevocable trust last?

The duration of an irrevocable trust depends on its terms. Some trusts terminate upon the death of the grantor, while others continue for multiple generations to provide long-term wealth protection. State laws, including the rule against perpetuities, may impact a trust's lifespan.