Irrevocable Trust

What Is an Irrevocable Trust?

An irrevocable trust is a trust that, once set up, cannot be easily modified, revoked, or terminated by the person who created it, known as the grantor or settlor. The grantor gives up substantial ownership and control over the assets placed in the trust. A trustee manages those assets for the benefit of named beneficiaries according to the terms written in the trust document.

This is different from a revocable trust, which the grantor can change or dissolve at any time while alive. Because the grantor gives up control, an irrevocable trust is generally treated as a separate legal entity for many purposes.

How It Works

When assets such as cash, securities, real estate, or life insurance policies are moved into the trust, they are typically no longer considered the grantor's personal property. The trustee holds legal title and must follow the trust terms and applicable fiduciary duties, which require acting in the beneficiaries' interests. Income generated by the trust may be paid to beneficiaries, accumulated, or distributed on a schedule set by the document.

Trusts of this type are often used in estate planning. Because assets are no longer owned by the grantor, they may fall outside the grantor's taxable estate, which can affect estate tax exposure. They can also help protect assets from certain creditor claims and can be used to provide for minors or family members with special needs.

Advantages and Disadvantages

• Potential estate tax benefits, since transferred assets may be excluded from the grantor's estate.
• Possible protection from certain creditors and lawsuits.
• Control over how and when beneficiaries receive assets.
• Loss of flexibility, since terms are difficult to change.
• Loss of direct control over transferred assets.
• Setup and administration can involve legal and accounting costs.
• The trust may pay its own income tax on retained earnings, often at compressed rates.

Why It Matters to Investors

For investors, an irrevocable trust can affect how a portfolio is owned, taxed, and distributed. Investment decisions are usually made by the trustee under the trust's terms, not by the original owner. Anyone considering such a trust typically consults an attorney and tax professional, since rules vary by jurisdiction and change over time.