7 Reasons Why You Should Create an Irrevocable Trust

Irrevocable Trust | The Pollock Firm LLC

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The world of estate planning can be quite confusing as there are an infinite number of ways to create a plan. Frequently, attorneys will create a trust. Sometimes, we recommend creating a Revocable Living Trust, and other times we recommend creating an Irrevocable Trust. In this post, I hope to answer a frequent question that I get, “Should I Create an Irrevocable Trust”? Here are 7 reasons why you should create an Irrevocable Trust.

What is a Trust?

If you wish to know the legal definition of a trust, click here. As a practical manner, a trust is simply a way to manage wealth. Rather than an individual owning an asset, controlling it, and being able to use it how they wish, a trust divides those three roles.

The person who creates the trust is known as the Grantor. The Grantor establishes the rules needed for a trust. The Grantor names a trustee to own and control the assets. The Grantor designates a beneficiary. Then, the Grantor establishes restrictions related to how a beneficiary can enjoy the assets added into the trust.

The Grantor can name himself or herself as Trustee and a beneficiary, or the Grantor can designate others to be trustee or beneficiaries. Typically, in a Revocable Living Trust, the Grantor is the trustee and beneficiary. When creating Irrevocable Trusts, the trustee and beneficiary are usually someone other than the Grantor.

You should never create a trust just for yourself. You should either create a trust for yourself and others, or you should just create a trust for others. Others can include family, friends, and/or charity.

Why Create an Irrevocable Trust vs. a Revocable Trust

Your goals will dictate whether you should create an Irrevocable Trust or a Revocable Trust. The first item to consider is who will benefit from the trust while you are alive and after you pass away. The second item to consider is how important asset protection is for yourself or others. The third item to consider is whether you wish to control the funds after your death. Finally, you should consider tax efficiency.

A Revocable Living Trust is typically used as a substitute for a Will. Accordingly, the goal of a Revocable Living Trust is to manage your own assets while you are alive, provide direction for where your funds go after you die, and avoid the probate process. A Revocable Living Trust allows you to make any changes you wish to your plan, whenever you like. You usually also have complete unfettered access to your own money.

If your goal does NOT require complete unfettered access to your own funds, then you may wish to consider an irrevocable trust.

The main reasons to create an Irrevocable Trust include:

  1. protecting your assets from creditors;
  2. protecting your assets from divorce;
  3. tax efficiency;
  4. controlling money for a beneficiary who is disabled;
  5. controlling money for a beneficiary who cannot properly handle money;
  6. ensuring funds are used for a certain purpose; and
  7. controlling the timing of distributions.

Most trusts will usually try to accomplish multiple goals at the same time. As a practical matter, unless someone is trying to qualify for government benefits (such as Medicaid or SSI), it is uncommon for a Grantor to fund an irrevocable trust until he or she can afford to give the money away. Creating an Irrevocable Trust can be expensive. Accordingly, if you are planning to create an Irrevocable Trust for a loved one, we recommend that you plan to give away enough to justify the cost of setting up the structure. After all, if you only wish to give away a little bit, it is easier to make an outright gift.

Using an Irrevocable Trust for Creditor Protection

When discussing the use of Irrevocable Trusts for Creditor Protection, we must first clarify who we are trying to protect. Are we trying to protect the Grantor or some third party? If the Grantor wishes to give money to a third party in trust and protect it from creditors, that is generally very easy and common. If we are trying to protect the Grantor’s assets, while also allowing the Grantor to have access to his or her own funds, that is much trickier and far more expensive.

Self-Settled Asset Protection Trusts

If your primary goal is to provide creditor protection for yourself, then generally you should consider a traditional asset protection trust or a Medicaid Asset Protection Trust (MAPT).

Traditional Asset Protection Trusts

A traditional asset protection trust is when you create a trust for your own assets, protect it from creditors, while also having access to those funds. Historically, it was impermissible to create a traditional asset protection trust. Gradually, certain countries allowed self-settled asset protection trusts to be created. These were commonly referred to as offshore trusts. Now, 17 states allow domestic asset protection trusts. (See this article written by the American Academy of Estate Planning Attorneys.)

With a traditional Asset Protection Trust, you are irrevocably waiving the right to receive the assets back, except as a third party trustee may agree. The more rights you retain to the funds in the irrevocable trust, the less asset protection you have.

In order to achieve the desired goal of creditor protection, self-settled asset protection trusts must be irrevocable. If they were revocable, and the Grantor was sued, a Court could simply order the Grantor to make the funds available to the creditor.

Medicaid Asset Protection Trusts (MAPT)

A Medicaid Asset Protection Trust is a trust designed to avoid having assets counted as a resource when qualifying for Medicaid, but also allows you to have some access to your own funds. With Medicaid Asset Protection Trusts, you typically only reserve the right to live in the property that the trust owns. If you have a right to receive too much of the funds back from a MAPT, you won’t qualify for Medicaid, defeating the purpose of the trust. All 50 states and the federal government recognize Medicaid Asset Protection Trusts.

Funding an Asset Protection Trusts

One must be careful when funding an Asset Protection Trust. Transfers to avoid existing creditors can be considered fraud. If fraud is involved, the trust won’t protect you from those creditors. However, if you make a transfer to avoid future, theoretical creditors, then that’s just considered good planning.

With respect to Medicaid Asset Protection Trusts, there is generally a 5 year lookback on all transfers. Accordingly, funding a MAPT within 5 years of trying to qualify for Medicaid will likely cause problems.

Trustee of an Asset Protection Trust

The Grantor should never be trustee of either of these trusts. Accordingly, the Grantor must give up control. However, the Grantor may reserve the right to hire and fire the trustee provided that the Grantor does not maintain too much control, and provided that the Grantor can’t become trustee.

Creating an Irrevocable Trust for OTHERS

If the trust is ONLY for others, and you wish to fund the trust while you are alive

It is quite uncommon to create a revocable trust if it only benefits third parties. Because you can revoke it and take the money back, it just doesn’t make much sense to create a revocable trust for someone else.

The main reasons to create an irrevocable trust and fund it during your lifetime are:

  1. because you wish to provide for others;
  2. you feel you can afford to give money away;
  3. you wish to control how the beneficiary receives the funds; and/or
  4. there is a tax benefit.

If you aren’t interested in the tax benefits, you can act as the trustee of this trust.

As mentioned above, when creating a Revocable Living Trust, usually the Grantor is the Trustee and beneficiary. However, the trust agreement should also dictate where the assets go upon the Grantor’s death. At the time of the Grantor’s death, the revocable trust becomes irrevocable. If money stays in trust for a third party, that new subtrust for the third party is also irrevocable.

For individuals with sufficient assets, you may wish to consider multiple revocable and irrevocable trusts, each with its own purpose.

Common Types of Irrevocable Trusts

There are many different types of irrevocable trusts. The most popular irrevocable trusts include:

  1. life insurance trusts;
  2. asset protection trusts;
  3. charitable trusts;
  4. trusts created upon death (such as QTIP trusts and bypass trusts);
  5. trusts for children (or other individuals); and
  6. special needs trusts.

Generally, an irrevocable trust is designed to prevent its terms from being modified in the future. As a practical matter, what this means is that a person (the Grantor) creates a document (the Irrevocable Trust) outlining how his or her beneficiaries should receive any assets that are placed into the trust.

The Irrevocable Trust document itself has provisions which state that the Grantor may not make changes or modifications to the trust. Unlike a Revocable Trust, the Grantor of an Irrevocable Trust gives up all control once the trust is created. There are times when such trusts can be later modified, whether by court or by consent of all the beneficiaries, but never by the grantor alone.

Frequently people also create an Irrevocable Trust because once assets are transferred to such trust they will receive favorable estate tax and inheritance tax treatment. Assets in Irrevocable Trusts receive favorable tax treatment because they are excluded from the gross estate of the grantor at the time of the grantor’s death.

Another reason people also create irrevocable trusts is to provide a means of protecting the assets in the trusts. By giving up control of the assets (in a non fraudulent way), a potential creditor may not sue the Grantor and try to claim against the assets in the trust.

In most states, including New Jersey, a Grantor may not be a beneficiary of an asset protection trust. However, a few states do allow self settled spendthrift trusts.


If you would like to learn more about whether you should create an irrevocable trust, I strongly encourage you to visit an experienced Wills, Trusts, and Estates Attorney.

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