An irrevocable trust is a trust which cannot be altered without the involvement and consent of the beneficiary, in contrast with a revocable trust, which can be changed by the grantor. There are some definite advantages to setting up an irrevocable trust, but there are also some very serious disadvantages which people should consider before establishing such a trust. It is also important to use the services of a skilled legal professional when writing up the documents which pertain to the trust, to ensure that it is established appropriately.
When a grantor creates an irrevocable trust, he or she gives up control of the assets in the trust. This creates a totally separate tax entity, because the trust is not controlled by the grantor, and it is not yet controlled by the beneficiaries, either. The trust pays its own taxes, and it is usually administered by a trustee.
Giving up one's assets might not seem to have any particular advantages at first glance. However, one of the convenient things about an irrevocable trust is that it allows people to avoid probate and many of the associated taxes and fees, because the grantor has given the property away before death. He or she can make contributions to the trust over the course of time, ensuring that beneficiaries will be able to access the trust immediately upon death, rather than having to wait through probate, and that beneficiaries will avoid many of the estate taxes and fees.
People can also use irrevocable trusts to protect their assets. Because the assets are not owned or controlled by the grantor anymore, the grantor's creditors have no right to access the funds and other assets in the trust. This technique can be utilized by someone who wants to make sure that his or her estate ends up in the hands of family members and other beneficiaries, rather than with creditors who would be able to take a slice of the estate during conventional probate proceedings. Reducing one's assets also tends to lower taxes, which can be a side benefit in some cases.
Irrevocable trusts may be utilized to create endowments to charitable organizations and other causes, as well. Someone who wants to create a trust which will go to his or her alma mater, for example, might opt to make an irrevocable trust for this purpose. Some life insurance companies also provide benefits in the form of irrevocable trusts.
When establishing an irrevocable trust, grantors should think carefully. Once the paperwork is signed, it cannot be unsigned, and the grantor will have lost control of his or her assets forever.