An irrevocable trust is a trust that cannot be modified or terminated without the permission of the beneficiary. The grantor effectively gives up all of his or her rights to the trust.
Irrevocable trusts are typically created for tax and estate planning purposes and involves three parties - the settlor or grantor, who is the person funding or contributing assets to the trust, the trustee who is the person that manages the trust, and the beneficiary or beneficiaries who is the person or people who will receive the trust’s assets. The trustee holds legal title to any assets held in trust while the beneficiaries hold equitable title. Some reasons for establishing an irrevocable trust include providing ongoing income to family members instead of a lump sum amount and for transferring assets in order to avoid estate taxes upon the death of the grantor.
Another benefit of this structure is that it transfers ownership of assets from the grantor to the trust, thereby relieving the grantor of any tax liabilities created by such assets. This may be beneficial to both the grantor and beneficiaries if the grantor is a substantially higher marginal tax bracket. The key to the tax and estate planning benefits of this type of trust is its irrevocable nature. Generally speaking, a revocable trust would be considered property of the grantor, while an irrevocable trust is considered a separate legal entity that owns the underlying assets. However, the irrevocability also means that once places in such a trust, the grantor has permanently relinquished control of and benefits derived from the assets.