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What Is An Irrevocable Trust And How Does It Work?

What Is An Irrevocable Trust?

An Irrevocable Trust is an important part of any estate planning or asset protection strategy. A trust can hold nearly any type of asset while at the same time protecting the owner and the beneficiary from any legal duress.

An irrevocable trust is a type of trust which usually can not be modified, amended, or canceled, except under specific conditions.

Usually, the only way to change an irrevocable trust is with the consent of the beneficiaries and/or the trustee, in accordance with the legalities which govern the trust. The prospect of putting one’s assets into an irrevocable trust is quite daunting to some, but these trusts do have some important benefits. 

Table of Contents:

Irrevocable Trust Work

How Does It Work?

To start a trust the grantor will designate the trustee and beneficiary/ies. The trustee can be one of the beneficiaries or an outside party. Beneficiaries can be any natural persons or entities who will benefit from the proceeds of the trust.

Trusts consist of three parties:

  • the grantor/settlor who places their assets into the trust
  • the trustee who is in charge of managing, protecting and distributing the assets in the trust
  • and the beneficiaries who receive the benefits of the trust.

Neither the trustee nor the beneficiaries can simultaneously be the grantor of the trust (note: the exception to this is an “Asset Protection Trust” which specifically allows for the grantor and beneficiary to be the same person).  

Once the grantor has transferred their assets into an irrevocable trust, they relinquish all ownership and control over them. The assets are then officially owned and controlled by the trust itself as a separate entity.

The important point here is that the assets no longer form part of the value of the grantor’s personal estate and have no bearing on their tax burden. This naturally has its advantages. 

Revocable Trust

In contrast, a revocable trust may be amended or terminated at any time by the grantor, provided they are deemed mentally sound. This means that the grantor officially still retains ownership rights over the assets which are placed in the trust.  It also means that they continue to form part of the grantor’s estate and form part of their income tax burden.

These types of trusts offer the advantage of flexibility in that the grantor can reclaim their assets from the trust at any time. However, they do not offer the same level of asset protection and tax efficiency as irrevocable trusts.


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There are certain conditions under which irrevocable trusts can be altered. Typically, the consent of all the beneficiaries is required to change the trust. There may also be certain laws and regulations which need to be followed, which can differ depending on the type of irrevocable trust and the jurisdiction in which it is formed. Newer irrevocable trusts often come with provisions which allow for greater flexibility.

One example is decanting, which enables an irrevocable trust to be transferred into a newer trust that has more up-to-date provisions and protocols. Some irrevocable trusts allow for changes in domicile which can also help to take advantage of different tax benefits and adapt to changing environments.

Benefits And Uses

Irrevocable trusts offer some key advantages compared to revocable trusts and other types of financial vehicles. The primary benefits and uses are:

  1. Asset Protection
  2. Tax Advantages
  3. Estate planning
  4. Social Security 

     1. Best Asset Protection

One of the greatest benefits of irrevocable trusts is that they provide the highest degree of protection against creditors, lawsuits, and judgements.

The assets which are transferred to an irrevocable trust are no longer owned by the grantor, meaning they cannot be claimed in a court of law. Furthermore, it is extremely difficult to amend the trust which means that creditors will not be able to obtain the right to be made new beneficiaries.

This is especially useful for individuals who are at an increased risk of having their assets claimed in lawsuits (e.g. medical doctors, attorneys, etc.).

     2. Tax Benefits

Transferring assets to an irrevocable trust removes them from the grantor’s taxable estate, meaning they will no longer incur income tax on those assets. Gifting these assets to the trust will also make them exempt from estate taxes.

This is an important consideration for wealthier individuals whose estate values would be above the IRS-allowed lifetime tax-free gift limit of USD 11.58 million. The amount of one’s estate above this limit is subject to a 40% federal estate tax.

Removing these assets from the estate and placing them in an irrevocable trust instead can therefore greatly reduce the overall tax incurred by beneficiaries and the grantor alike.

     3. Estate Planning Benefits

Irrevocable trusts can offer tailor-made estate planning structures. They allow the grantor to set up different rules and protocols related to the distribution and oversight of the trust assets.

For example, certain conditions can be laid out when the trust is formed to distribute the trust assets to beneficiaries over a period, or when certain criteria are met, such as age. This can offer protection against irresponsible behaviour on the part of beneficiaries.

Assets can also be ‘gifted’ whilst still retaining the income from them and reducing taxes. These types of structures can benefit all parties in the trust agreement.

     4. Social Security Income and Medicaid Eligibility

Irrevocable trusts enable you to qualify for various government social security programs which have an asset limit because they greatly reduce the overall value of your estate. These include Social Security income, Medicaid, and others.

It is important to be aware that there is a five year “look back” period for Medicaid eligibility, meaning that assets which were transferred less than five years ago are not excluded from the Medicaid eligibility calculation.

Go here for: Drawbacks of an Irrevocable Trust

Irrevocable Trust

How to Set One up

  1. Create a Trust Agreement
    • This is a legal document that designates the different parties to the trust (grantor, trustee and beneficiary) while also outlining how the trusts are managed.
  2. Trust Funding
    • Asset are transferred to the trust usually in the form of accounts, physical property, or digital property
  3. Trust Administration
    • Recording all the tasks that are needed to fulfill the obligations of the trust including accounting and any other institutional reporting that may need be carried out (depending upon the country)


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Domestic vs Offshore Trusts

There is a clear distinction between Domestic Irrevocable Trusts and Offshore Irrevocable Trusts. Domestic Irrevocable Trusts may often be more convenient, easier, and cheaper to form. However, they do not provide the same level of asset protection as offshore trusts.

Offshore Irrevocable Trusts have shown to provide the highest level of protection, as they place one’s assets far out of reach of local courts and creditors. In addition, they can be set up in jurisdictions which offer more favourable tax rates and exemptions, greater confidentiality, and numerous other benefits unique to the specific country in question.

This makes them the preferred vehicle for wealthier individuals looking for a more complete asset protection structure.  

Trust Types

Included within both Domestic and Offshore Irrevocable Trusts, there exists many different specific types, such as:

  • Irrevocable life insurance trust (ILIT)
  • Special needs trust
  • Charitable trusts
  • Grantor-retained annuity trust (GRAT)
  • Spousal lifetime access trust (SLAT)
  • Qualified personal residence trust (QPRT)
  • Irrevocable gift trust (IGT)

 For more>> Different Types of Irrevocable Trusts

The important point to note is that each different type has its own unique structure and rules and therefore comes with its own benefits and uses.

This allows one to easily tailor their trust according to their specific needs and circumstances. 


Irrevocable trusts have proven to be highly efficient financial vehicles which can help one to protect their assets, reduce their tax burdens and effectively manage the distribution of their estate.

There are also numerous different types and ways that one can structure an irrevocable trust to maximise their potential benefits. Before entering into an irrevocable trust agreement, it is important to understand their complex nature and all the implications involved.

For this reason, it is highly recommended to seek expert advice and guidance in setting up an irrevocable trust which can best meet your own specific requirements and avoid any pitfalls. 

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***Please Note: If you are a resident of a country that is a signatory of the Common Reporting Standard (CRS) (or a US citizen) your tax reduction possibilities are limited. Due FATCA, CRS, and CFC laws you may not be able to completely eliminate your taxes without moving your residence. While opening an offshore company can increase privacy and asset protection, your tax obligations remans tied to your ownership of overseas entities. Offshore company's are often not taxed in the country where they are incorporated, rather you as the owner are obligated to pay taxes in the country where you reside. Please make sure you know your tax obligations, as we are not tax advisors. Please seek a local tax professional for help regarding your situation. 

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