Tax Benefits of Irrevocable Trust

By: David Carnes | Reviewed by: Ashley Donohoe, MBA | Updated March 11, 2019

An irrevocable trust can be used to provide for your family after you die.

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When you establish an irrevocable trust, the assets that you place in it no longer legally belong to you. An irrevocable trust typically cannot be revoked or amended without a court order or the consent of all beneficiaries. In exchange for giving up control over trust assets, the Internal Revenue Service offers certain tax benefits that are unavailable to revocable trusts.

Tip

An irrevocable trust is taxed as trust income, rather than earned income, which can result in some tax savings.

Irrevocable Vs. Revocable Trust

Since the Internal Revenue Service treats revocable and irrevocable trusts quite differently, make sure that the trust is actually irrevocable before you attempt to claim the benefits of an irrevocable trust. If it turns out to be revocable, you can always amend it to turn it into an irrevocable trust.

The trust is irrevocable if the trust document states clearly that it is irrevocable. If it doesn't, then its revocability depends on state law. Some states will presume that it is revocable, while others will presume that it is irrevocable.

Irrevocable Trust Tax Advantages

An irrevocable trust protects taxpayer assets because it essentially removes your ownership of assets and transfers the assets to the trust itself. As the grantor of an irrevocable trust, you can no longer unilaterally change the parameters of the trust. This kind of trust carries the tax advantage of removing taxable assets from your estate, which is beneficial if you have a sizeable estate to reduce your tax liability.

How Irrevocable Trusts Are Taxed

An irrevocable trust is taxed as a legally independent entity, in much the same way as an individual taxpayer is taxed in terms of income tax rates and available deductions. Contributing income-earning property to an irrevocable trust means that the IRS will treat the resulting income as trust income, not your income. This could put you into a lower tax bracket, even if the trust is taxed at the lowest income tax rate.

The Benefits of Estate Taxes

The estate tax is levied against the estate of a deceased taxpayer. Estate tax must be paid before any estate assets are distributed to heirs. The IRS taxes only the value of an estate that exceeds the estate tax exemption, which is $11.4 million in 2019.

Since the assets of family trust fund tax benefits are not subject to estate tax, if you anticipate that the value of your estate will exceed the estate tax exemption for the year of your death, placing assets into an irrevocable trust and naming your heirs as beneficiaries can eliminate this liability.

Irrevocable Life Insurance Trusts

One way that the value of your estate could exceed the estate tax exemption is through life insurance proceeds because these proceeds are included in the value of your estate. Contributing your life insurance policy to an irrevocable trust, however, renders these proceeds exempt from estate tax. If you anticipate that you will become liable for estate tax based on your other assets, you can use an irrevocable life insurance trust to help your heirs pay estate taxes after you die.

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About the Author

David Carnes has been a full-time writer since 1998 and has published two full-length novels. He spends much of his time in various Asian countries and is fluent in Mandarin Chinese. He earned a Juris Doctorate from the University of Kentucky College of Law.

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