An irrevocable trust is a legal vehicle that allows an individual to place his assets under the control of a trustee. The trustee administers the trust and distributes the assets to the beneficiaries at the appropriate time. A revocable trust also allows you to protect your assets as well as specify how you would like your assets distributed. The assets you place in a revocable trust are still owned by you during your lifetime. Assets in an irrevocable trust are no longer yours; the trust is a separate entity from you. Unlike revocable trusts, irrevocable trusts cannot be unilaterally revoked, changed or amended. Because of this, there are some disadvantages to having an irrevocable trust.
A major disadvantage of an irrevocable trust is that you lose control over any asset that you place in it. You fully surrender ownership, and all assets are re-titled in the name of the trustee or of the trust. The irrevocable trust is completely out of your hands and can be revoked only by court order under certain circumstances or if you have the consent of all the beneficiaries.
All irrevocable trusts are viewed as separate taxable entities. The trustees must file the proper forms with the Internal Revenue Service. If any beneficiary receives a distribution during the year, the trustee must give each one a copy of the schedule K-1; however, the schedule does not have to be filed. As of 2011, the irrevocable trust income tax rate is 35 percent for amounts over $11,350; in comparison, the income tax rate for a single individual is 35 percent for amounts over $397,150.
The trustee must file federal income taxes for any income that an irrevocable trust earns that is over $600 during the year. The taxes are paid using the assets of the trust. The tax rate for irrevocable trusts is normally higher than the rates for individuals.
Any transfer of assets into an irrevocable trust that is over a certain amount may be subject to gift tax. As of 2012, the gift tax exemption is $13,000; you may give this amount per year per beneficiary, but any amount above that is subject to gift tax. The creator, or the grantor, of the irrevocable trust pays the gift tax. The gift tax can sometimes be as high as 35 percent. The grantor should work with an account or attorney as there may be estate tax exclusions that can be applied in his situation.