Definition of Irrevocable Trust

An irrevocable trust cannot be changed. It is a trust that, by its terms, can’t be changed except by terms that might be written into the irrevocable trust. It must operate according to whatever are its terms.

An irrevocable trust is typically set in a particular jurisdiction:
  • It is considered an independent person under the tax codes to the extent that it earns income that is taxable.
  • Irrevocable trusts must pay taxes at a trust rate, but will get a deduction for distributions to beneficiaries.

Significant Features of an Irrevocable Trust

When distributions are issued to beneficiaries for earnings inside of a trust, a K1 is issued from the irrevocable trust and beneficiaries are taxed at their personal rates, rather than at the trust rate. For more information about trusts and taxes, read the IRS report: Abusive Trust Tax Evasion Schemes – Questions and Answers.

  • Ultimately, any living trust or revocable trust becomes an irrevocable trust at death. So, until death, a living (or revocable or inter vivos) trust is taxed based on the Social Security Number (SSN) of the person who can change it.
  • All income that is earned by — and all statements of assets that are in such a living revocable trust — are provided to the trustee and are taxed based on the SSN of the person who set up the trust.
  • At death, a wall goes up, after which the trust gets its own tax id number (IRS Form W-9), and all earnings after the date of death are going to be taxed at the irrevocable trust tax rate.
  • From that point forward, the trust cannot be changed any more, except under certain specific terms that might be provided in the trust.

Other Methods To Revoke An Irrevocable Trust

You can go through the courts to change an irrevocable trust, and usually the courts are going to look for all beneficiaries to consent. The court will look to protect the donor’s intent and that the intent is being honored.

In the absence of that, many trusts include “flight provisions,” which include rules that the trustee and the jurisdiction must change in the event a court or a creditor are going to seize assets from the trust, or that risk might occur.

  • If a flight provision goes into effect, the jurisdiction might even go “offshore” to a prearranged offshore jurisdiction, and thereafter operate under the rules of that jurisdiction.
  • In that case, the courts and creditors would have to start all over again, and may not find the offshore courts as friendly as in the original jurisdiction.

Also, “decanting statutes” that, if the trust terms become less restrictive and the beneficiaries all agree, allow for one trust to “decant” into, or pour into, another trust that is set up to achieve the same purpose. Examples of when “decanting” may become a viable option include:

  • When the first trust may have certain tax issues, which were unanticipated by changes in the law or another reason, and the second trust may not.
  • When assets may simply be, by the agreement or because of a change in circumstances, more supportive of the beneficiaries in the trust into which the decanting occurs.

The terms of a trust can provide, by unanimous or majority vote of beneficiaries, that trusts or sub-trusts under the original irrevocable trust can be changed, typically so the assets can be made more accessible or available for the beneficiaries under different terms.

Donor Intent

Typically, the donor intent is not specifically spoken to in trust documents, except from a financial standpoint. Most documents say something like, “I want to give this to this person under these terms at this particular time,” and that is considered to be the donor intent. Anything beyond that is not considered donor intent. However:

  • Most trust donors are intending, through the type of trust they establish, some expression of faith, hope, love and support for family members. Unfortunately, we usually you don’t see that expressed within the trust documents.
  • Most of the time, trust donors have concerns, and even specific instructions they would provide, if questioned about what their life’s work is going to support within society when they are gone.
  • Donors also have concerns for the well-being and health of different family members — and their societal contributions — as well as the happiness experience by future family and heirs. Unfortunately, those concerns are also frequently not expressed.

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