Irrevocable Trust
Quick Definition
A trust that cannot be modified, amended, or terminated by the grantor after it is established.
Key Takeaways
- Assets in an irrevocable trust are removed from the grantor's taxable estate
- The grantor permanently gives up ownership and control of transferred assets
- Irrevocable trusts provide asset protection from creditors and lawsuits
- Medicaid has a 5-year lookback period for assets transferred to irrevocable trusts
What Is Irrevocable Trust?
An irrevocable trust is a legal arrangement in which the grantor permanently transfers assets to a trust, relinquishing all ownership rights and control over those assets. Unlike a revocable trust, an irrevocable trust cannot be changed, modified, or dissolved by the grantor without the beneficiary's consent or court order. This permanent transfer offers significant benefits: assets are removed from the grantor's taxable estate (reducing estate taxes), protected from creditors and lawsuits, and may help with Medicaid qualification (after the 5-year lookback period). Common types include irrevocable life insurance trusts (ILITs), charitable remainder trusts, and special needs trusts. The primary trade-off is losing access to and control over the transferred assets.
Irrevocable Trust Example
- 1A business owner transfers $5M in assets to an irrevocable trust, removing them from their taxable estate and saving over $2M in estate taxes.
- 2An irrevocable life insurance trust (ILIT) owns a $2M life insurance policy, keeping the death benefit outside the insured's estate.
- 3A parent creates an irrevocable trust for a disabled child (special needs trust), preserving Medicaid eligibility while providing supplemental funds.
Related Terms
Trust Fund
A legal entity that holds and manages assets for the benefit of designated beneficiaries according to specific terms.
Estate Planning
The process of arranging for the management and transfer of assets during life and after death.
Beneficiary
A person or entity designated to receive assets, benefits, or proceeds from a financial account, insurance policy, trust, or estate.
Living Will
A legal document specifying medical treatment preferences if a person becomes unable to communicate their wishes.
FAFSA (Free Application for Federal Student Aid)
The federal form used to determine eligibility for financial aid including grants, loans, and work-study programs.
401(k)
An employer-sponsored retirement savings plan with tax advantages, often including employer matching contributions.
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