When it comes to safeguarding your assets and securing your legacy for future generations, an irrevocable trust is one of the most effective tools in estate planning. By setting up an irrevocable trust, you can retain control over your assets while protecting them from potential creditors, estate taxes, and other unforeseen circumstances. However, structuring an irrevocable trust requires careful consideration of legal and financial factors, as well as a deep understanding of your personal goals and objectives. In this guide, we will delve into the key aspects of structuring an irrevocable trust, including its definition, advantages, and potential drawbacks. We will also provide tips and insights on how to select the right trustee, choose the appropriate assets to transfer, and manage the trust effectively.

What is an irrevocable trust?

Firstly, we should consider the role of a trust in the broadest sense. Creating a trust is an important part of estate planning. A trust offers several advantages, including the ability for you (the Grantor) to maintain control over your assets, ensure they are distributed according to your preferences, and provide potential tax advantages. With the assistance of the right estate planning attorney, you can craft a customized trust that fits your specific needs and preferences.

More specifically, an Irrevocable Trust (ILT) is a type of trust that is set up during the lifetime of the grantor. Unlike a revocable living trust that can be amended or revoked at any time, once an ILT is established, it cannot be amended or revoked. This type of trust is often used for estate planning purposes, and as the name suggests, it is “irrevocable”–meaning that once assets are placed into the trust, they cannot be taken out. By setting up an ILT, you can safeguard your assets and protect them from various liabilities that may threaten your financial security. These types of trusts offer ultimate protection and security for yourself, your family, and other beneficiaries you designate. To learn more about different types of trusts, read What is a Trust?

What are the benefits of an irrevocable trust?

One benefit of creating an ILT is the potential to minimize tax liability. When assets transfer into the ILT, they are removed from the grantor’s taxable estate, reducing the amount of estate tax owed. In addition, an ILT allows individuals to transfer assets to beneficiaries without incurring gift tax liability. However, you should always consult with a professional tax advisor to provide specific tax scenarios for your circumstances.

Another advantage of an ILT is the protection it provides against creditors and lawsuits. Since the assets are no longer owned by the grantor, they may not be subject to seizure by creditors in case of bankruptcy or lawsuit. This can be particularly beneficial for individuals in high-risk professions or those with significant liabilities.

It is important to note that establishing an ILT requires careful planning and consideration. Once the trust is created, the grantor relinquishes control over the assets, which are now managed by the trustee. While this can provide significant protection and tax benefits, it also means that the grantor must trust the designated trustee to make prudent decisions regarding the assets and beneficiaries.

How do you create an irrevocable trust?

The creation of an irrevocable trust requires the expertise of a team of professionals, including, but not limited to, an estate planning attorney, financial advisors, accountant,  and trust officer. These professionals can help you navigate the complex legal and financial aspects of your trust to ensure that it meets your needs. Additionally, they will be able to provide guidance on important considerations such as choosing a trustee, determining which assets will be transferred into the trust, setting the terms for distribution, and other details related to its establishment. With their assistance, you can create an irrevocable trust that is tailored specifically for you.

To prepare for your meeting with estate planning professionals, consider these questions:

  • Which assets do I want to transfer into my trust? Your trust can include real estate, stocks, bonds, and any other valuable assets that you want to protect. It is important to consider both the short-term and long-term benefits of transferring these assets into the trust, as it will have a significant impact on your estate planning goals.
  • How will my assets be distributed? When creating the trust agreement, be as specific as possible about your wishes and intentions. Determine the circumstances of when and how the assets will be distributed.
  • Who will serve as my trustee? Your trustee will manage the assets within the trust and carry out your intentions in accordance with the terms of the trust agreement. It is crucial to choose someone who is responsible, trustworthy, and understands the complexities of trust management. You may also want to consider appointing a successor trustee in case your original trustee is unable to fulfill their duties. A trust company can serve as a great trustee. Trust companies abide by the fiduciary standard, so they have a legal obligation to act in the best interest of their clients.

How do you fund an irrevocable trust?

There are several ways to fund an irrevocable trust. One option is to transfer ownership of assets directly to the trust. Assets can include stocks, real estate, and even valuable personal items. The main advantage of this approach is that it allows you to remove these assets from your estate, thereby reducing your estate tax liability. However, there can be tax implications associated with transferring these assets, so it is important to consult with a tax professional before settling on the transfer of assets.

Another way to fund an irrevocable trust is through life insurance policies. This involves setting up an irrevocable life insurance trust and naming the trust as the beneficiary of the policies. When the policyholder dies, the death benefit is paid to the trust, which then uses the funds to distribute assets to the beneficiaries. The main advantage of this approach is that it provides tax-free income to the beneficiaries and can also help to minimize estate taxes.

In addition to these methods, some people choose to fund their irrevocable trusts with annual gifts. This involves transferring up to the annual gift tax exclusion amount (currently $17,000 per individual, and $34,000 per married couple) to the trust each year. Over time, these gifts can add up and help to fund the trust.

If you are an entrepreneur or business owner, funding a trust may require more intricate planning. In such cases, business owners may use techniques to reclassify some assets as personal/family assets and transfer them to their living trust. Other funding options could include setting a separate trust solely for the business’s benefit. Such funding options require more specialized knowledge, so it is essential to work with a savvy estate planning attorney and tax advisor who understand the intricacies of business ownership and estate planning.

Is a revocable trust better than an irrevocable trust?

While both revocable and irrevocable trusts can be beneficial for estate planning purposes, there are significant distinctions between the two. As mentioned previously, an irrevocable trust cannot be amended or revoked once established. The grantor surrenders ownership and control of the assets transferred into the trust, and the trust becomes a separate legal entity with its own tax identification number. A revocable trust can be amended or revoked at any time by the grantor (during their lifetime), providing greater flexibility and control over the assets within the trust. In addition, the grantor retains ownership of all assets transferred into the trust until their death.

Another important difference between revocable and irrevocable trusts is taxation. In a revocable trust, the grantor is responsible for the taxes on any income generated by the assets within the trust. However, with an irrevocable trust, the trust will be responsible for any taxes on income generated by the assets transferred into the trust. This can be beneficial in certain situations where the grantor is looking to minimize their tax liability.

While setting up a revocable trust can provide some level of asset protection during the grantor’s lifetime, it does not provide the same level of protection as an irrevocable trust. With a revocable trust, the grantor still technically owns the assets and may still be vulnerable to creditors and lawsuits.

Deciding between an irrevocable or revocable living trust should not be viewed as a this or that decision, but rather each should be evaluated individually as parts of your estate plan. It is important to have a clear understanding of both types of trusts. While a revocable trust provides more flexibility and control over your assets, an irrevocable trust offers greater asset protection and the potential for tax benefits. To ensure that your long-term financial plan is well suited to your individual objectives, it is advisable to collaborate with an estate planning professional. For more information about Members Trust Company’s estate planning services, contact us.


Non-deposit investment products available through Members Trust Company are not deposits of or guaranteed by the trust company, a credit union or credit union affiliate, are not insured or guaranteed by the NCUA, FDIC or any other governmental agency and are subject to investment risks including possible loss of the principal amount invested. Members Trust Company, owned and managed by America’s credit unions, is a special purpose federal thrift regulated by the Office of the Comptroller of the Currency. Past performance is not indicative of future results. This is for informational purposes only and is not intended to provide legal or tax advice regarding your situation. For legal or tax advice, please consult your attorney and/or accountant. Any opinions expressed are those of the presenter and do not necessarily reflect the position of Members Trust Company. The information above is obtained or compiled from sources we believe to be reliable. We Do Not Guarantee that such information, will be free from errors, omissions, whether human or mechanical, nor do we guarantee their timeliness, accuracy, or completeness.