How Establishing Irrevocable Trusts Can Benefit You Financially

Irrevocable trusts cannot be changed without the beneficiary’s permission, due to which they are fixed. You can consider placing your assets in an irrevocable trust to minimize hefty estate taxes, protect your assets from creditors and lawsuits, and become eligible for government programs like Medicaid.


There are also some downsides, but these benefits cannot be ignored. If you’re thinking of relinquishing control of your assets, there are some things you must consider. For those who are unaware, a trust is a fiduciary relationship, typically involving three parties.


These include:


  • The grantor, the person who creates and transfers property to the trust,

  • The trustee, who is responsible for managing and administering funds for the trust as instructed.

  • The beneficiary, who benefits from the income or assets in the trust.



One person can take all three positions, in which case they’ll have a revocable trust, i.e., a trust where the terms can be changed or revoked at any time. On the other hand, an irrevocable trust is a trust where the terms cannot be modified without the beneficiary’s consent. There are three primary (and perhaps the only) reasons you need irrevocable trust.


Reduces the Burden of Estate Tax


Taxpayers who have large estates will benefit from setting up an irrevocable trust. Irrevocable trusts act as a tax shelter. Life insurance is considered an asset in your estate and is liable to taxes, contrary to popular belief.


If you have, say, a life insurance of $1 million, the Internal Revenue Service (IRS) considers this policy an asset. After your death, the IRS views this as an asset you transferred to your beneficiaries and taxes it.


To avoid it, you should consider an irrevocable life insurance trust. The policy proceeds do not contribute to the grantor’s estate, so they are not taxable.


You may also consider the grantor-retained annuity trust (GRAT), which reduces tax liability when passing your assets to your heirs. Lastly, consider Charitable Remainder Trusts where the chosen person (or family) continues to receive an income with a tax deduction. Upon their death, the remaining trust funds go to the selected charity.


Protection Against Lawsuits


Irrevocable trusts help protect your assets from creditors. These are called asset protection trusts, where the trustee and beneficiary are not the same or have limited power of trust funds even if they are the same party.


People with certain professions, like surgeons, lawyers, and architects, especially those in litigious societies, can benefit from irrevocable trusts. Credits cannot liquidate the assets in an irrevocable trust to pay personal debts.


Gaining Eligibility For Government Programs


Beneficiaries with disabilities on Medicaid have income and asset limitations. If they receive too much money, they might lose these benefits. Irrevocable trusts help protect these assets and income.


A Medicaid irrevocable trust offers protection from creditors and ensures the trust funds are not included in the beneficiary’s own income or assets. This way, the disabled or disadvantaged beneficiary does not exceed their limits and will be eligible for government programs and continue to receive the benefits that come with them.


While irrevocable trusts have some undeniable benefits, there are also several downsides, the most obvious of which is loss of control over one’s assets. However, if you fear lawsuits and judgments, own a huge estate liable to heavy taxes, or are eligible for Medicaid, you should consider the protection that irrevocable trusts offer.