What is an Irrevocable Trust?

While most types of living trusts are revocable, and thus can be changed even after they’ve been drafted, either with a few simple updates to reflect changes in status or by being rewritten wholesale, this is a key appeal with living trusts. At the same time, there is another type of trust – the irrevocable kind. This type of trust cannot be altered by the person who writes it unless they have the express permission of the beneficiary. Of course, in certain instances, this can mean more than one beneficiary. This can put strain on the process, especially if the grantor of the trust and the beneficiary grow apart in some manner. This does not mean that the irrevocable trust is not useful, as it has different benefits than the typical living trust.

An irrevocable trust can:

  • Utilize the estate tax exemption by removing the taxable assets from your name.
  • Provide further protection for the face value (death benefit) for a life insurance policy – removing the proceeds from the estate.
  • Provide conditions for distribution in order to prevent beneficiaries from misusing assets.
  • Remove appreciable assets from the estate while also providing a step-up basis in valuing the assets for tax purpose for beneficiaries.
  • Gift a primary residence to one or more children under advantageous tax rules.


As you consider the type of trust you want to draft, here is a break down of a common type of irrevocable living trust.

What is a Living Life Insurance Trust?

When you get an irrevocable life insurance trust, you are given much more control over what your insurance policy can do and the money that will be paid out from them. This process also gives you the ability to reduce, or possibly even eliminate, estate taxes outright which will direct more funds to your family. However, this requires a few additional steps in the process of securing a life insurance policy – signing it out of your name and into the name of your trust and making the trust the beneficiary. It is highly recommended that you are not your own trustee in instances like this, as life happens, and details can slip past us, such as the premiums that need to be paid for a life insurance policy in order to keep it active and not allow it to lapse. This does not mean that you cannot be your own trustee or that you must rely on a stranger to be your trustee, how a living trust is handled is entirely up to the person setting up the trust. The tax advantages apply only if you are not the trustee, which is why many choose a spouse, adult child, trusted confidant, or a corporate trustee in their stead, while you are still the owner of the policy.

The Owner of the Policy

If you are not listed as the owner of the policy, if they die first then the money that is paid out is a part of their estate and not yours. By owning it, even in your trust, you have control over the policy, if anything bad happens to you or your financial situation – such as a creditor garnishing it – it is because of an action that you have taken, and not because of another. By putting another as the trustee, on the other hand, you own the policy, they take care of the policy via the instructions put in the trust, but there are no negative consequences if something happens to the trustee’s finances. It is your trust, still, they are simply overseeing how it is handled. When your trust is the beneficiary, your trustee is capable of using the proceeds to dole out loans as needed to your trust, to pay taxes, fees, and to purchase assets. The proceeds that stay in the trust are protected from the courts, any creditors, and possibly even from spouses. It allows the trust to control the flow of the cash, protecting it from irresponsible spending. By naming another as the beneficiary of the trust, you lose all control over how it is spent and utilized – as it is the beneficiary who has that power.

The Trust as the Beneficiary

By naming the trust as the beneficiary, rather than an individual person, you also include another layer of protection from an invasive, and unnecessary, legal intervention – a succession list of trustees. The trustee is the one who oversees how the funds are handled, under the express written direction of the trust, but there is a section in the trust that designates who will succeed the primary trustee should they become incapacitated in one manner or another. An individual who is the beneficiary can become incapacitated as easily as the trustee, but they are the sole person who inherits the policy. When a person becomes incapacitated, the states have their own set of laws that determine how a person is cared for when no other ‘guardian’ can. This includes control over how the proceeds from a life insurance policy are spent, until the person is no longer incapacitated. A trust, on the other hand, can include how the finances of the trust are to be used to care for an incapacitated family member – such as a guardian, how the funds are to be spent caring for them, and what will be expected of the guardian in terms of long term care. Living trusts have an incredible amount of power, especially when it comes to limiting the power the courts often have to intervene.

Existing Policies

An important detail that must be pointed out for those who already have an existing life insurance policy – there is an additional requirement in order to protect the funds from taxes. You cannot die until at least three years after the policy is transferred into a living trust. If the holder of a life insurance policy who has transferred their policy into a trust does die, then the IRS considers the transfer invalid and will include the life insurance policy in your taxable estate. It might also be counted as a gift that would incur a gift tax, making it extremely important that you discuss this with your advisor, first. In fact, one of the professionals you should speak with regarding a living insurance trust is a relationship with an insurance expert, who will know the ins and outs of life insurance and how they intertwine with living trusts. Legalese can be a difficult language to parse, and they are adept at knowing what will and will not apply to your particular situation.

The Importance of Life Insurance

When to get a life insurance policy can be difficult to pin down – it is entirely dependent on your personal situation. Waiting until you are in your fifties or sixties may not be the best time frame. It is important to not wait until you are uninsurable, though. The advantages of a living insurance trust far outweigh the disadvantages, as it protects your policy and your heirs from any interference from the courts if the intended recipient is incapacitated in any manner. Just like a living trust is right for everybody, so to is life insurance – it adds a safety net for your loved ones during one of the most difficult times in their lives.