Breaking Down The Most Common Types of Irrevocable Trusts

types of irrevocable trusts

An irrevocable trust is a legal arrangement in which assets are placed under the control of a trustee for the benefit of beneficiaries. The grantor cannot change or revoke this type of trust once it is created. Due to their unique benefits and features, irrevocable trusts have become increasingly popular as part of estate planning strategies.

Read below to learn the different types of irrevocable trusts.

Types of Irrevocable Trusts

Several types of irrevocable trusts can be utilized in estate planning. Each type has specific features that may suit certain individuals or situations.

Bypass Trust

A bypass trust, a credit shelter trust, allows the grantor to pass assets to their beneficiaries without incurring estate taxes. This type of trust benefits married couples who want to minimize estate taxes. It also ensures their assets are passed down to their loved ones, making it an asset protection.

Bypass Trusts are primarily designed to protect a spouse’s wealth upon the death of the first spouse. When the first spouse dies, a portion of their estate equal to the estate tax exemption is put into the Bypass Trust.

These assets are not subject to estate tax, thus the name “tax-exempt”. The surviving spouse can then use the income from the trust for their own needs. The principal is maintained for the beneficiaries.

Generation-Skipping Trust

A generation-skipping trust (GST) allows assets to be passed down through multiple generations without incurring estate or gift taxes. This types of irrevocable trusts is commonly used to leave assets to grandchildren or future descendants.

By skipping a generation, these trusts can reduce tax liabilities. It also protects assets for future generations.

A generation-skipping trust (GST) is a powerful tool with unique characteristics. This differentiates it from other types of trusts.

Primarily, GSTs are used to transfer wealth to grandchildren or later generations. This is “skipping” the children’s generation.

This mechanism allows for a significant reduction in estate taxes. It is typically applied when assets are passed from generation to generation.

Charitable Trust

A charitable remainder trust is an irrevocable trust that allows assets to be donated to a charity. It also provides tax benefits for the grantor. This type of trust can be set up during the grantor’s lifetime or after their death through a will.

Charitable trusts offer numerous benefits. It reduces income and estate taxes. It provides a source of income for the grantor or their beneficiaries. It also leaves a lasting legacy by supporting charitable causes.

Additionally, charitable trusts can offer a way to support charities. It also maintains control over the assets during the grantor’s lifetime.

Life Insurance Trust

A life insurance trust is an irrevocable trust that holds a life insurance policy on the grantor’s life. This types of irrevocable trusts allows the policy proceeds to be passed down to beneficiaries outside of the grantor’s estate. It avoids estate taxes.

Life insurance trusts are often used in larger estates where a substantial amount of life insurance coverage could potentially cause estate tax issues. By placing the policy into an irrevocable trust, it is no longer considered part of the grantor’s estate. It will not be subject to estate taxes.

Special Needs Trust

A special needs trust is designed to provide for disabled individuals without disqualifying them from government benefits. This includes Medicaid or Supplemental Security Income (SSI).

This type of trust can supplement government assistance. It ensures the beneficiary can access necessary care and services.

By placing assets into a special needs trust, the beneficiary can still benefit from the trust without jeopardizing their eligibility for government assistance. These trusts are highly customizable. It can be tailored to the specific needs of the individual with a disability.

Factors to Consider When Choosing Irrevocable Trusts

It is essential to understand each type’s unique features and benefits. Several factors must be considered when deciding on the type of irrevocable trust. This includes:

Tax Implications

Each type of irrevocable trust has its tax implications. It is essential to understand the potential tax consequences before choosing a trust. Consult with trusts lawyer or tax professional. This can help determine the most beneficial trust for your situation.

Asset Protection

Irrevocable trusts offer significant asset protection. They are not considered part of the grantor’s estate. This means that the assets in the trust may be shielded from creditors and other potential threats.

Control and Flexibility

It is essential to consider how much control and flexibility you want over the trust and its assets. Some trusts may offer less control but provide significant tax benefits. Others, such as a life insurance trust, may allow for more asset control while still giving estate tax protection.

Beneficiaries’ Needs

When choosing an irrevocable trust, it is essential to consider the needs of the beneficiaries. Special needs trusts can ensure that disabled individuals receive the care and support they require without losing eligibility for government benefits.

A thorough understanding of their financial stability, personal circumstances, and long-term requirements is crucial. For younger beneficiaries, considerations may include their education expenses and potential home purchases. For adult beneficiaries, considerations may include their income and retirement goals.


It is important to note that creating an irrevocable trust can be costly. Each type of trust may have different fees. Investigating these costs is crucial when deciding on the most suitable trust for your situation.

Setting up an irrevocable trust can involve various costs. This includes attorney fees, trustee fees, and administrative costs.

Attorney fees are usually the most significant. Creating trust involves complex legal work. Depending on the complexity of the trust and its terms, the attorney’s fees can range from a few thousand to several thousand dollars.

Trustee fees are another critical cost to consider. Trustees are typically paid a percentage of the value of the trust’s assets. Their fees can add up over time.

Knowing the Types of Irrevocable Trusts

Irrevocable trusts offer numerous benefits and features that make them an attractive option for estate planning. Individuals can choose the most suitable trust for their unique situation by understanding the various types of irrevocable trusts. Consult with a legal or financial professional to determine the best action for your estate planning goals.

Feel free to begin exploring these options today. Remember that each type of irrevocable trust has its benefits and considerations.

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