An irrevocable trust is one in which the Grantor (person creating the trust) completely gives up all rights to the property transferred into the trust and retains no rights to revoke, terminate or modify the trust in any way. The major benefits of this type of trust include:

Avoiding Estate Taxes:
A trust is a separate taxable entity and pays tax on its accumulated income. The property in the trust is not part of the Grantor's estate and will not be subject to estate taxes.

Long-term Care:
Irrevocable trusts can be set up as a way to protect assets from long-term care expenses.  The Irrevocable Trust is the owner of the assets and the Grantor no longer has a claim to them.  Because the Grantor no longer owns any assets, they could qualify for Medicaid assistance. Medicaid is a combination state and federal government program designed to pay the medical bills of those who can't afford to pay for care. Medicaid will pay nursing home bills for the Grantor, as long as the Trust was established at least five years before the Grantor applied for Medicaid.

When such a trust holds a life insurance policy, usually on the grantor's life, it is an irrevocable life insurance trust.

Funding Alternatives:
An irrevocable life insurance trust may be either "funded" or "unfunded."

In a funded life insurance trust, the grantor not only transfers the life insurance policy to the trust, but also transfers other property to the trust from which the premium payments may be made. The property may be in the form of cash, securities or other assets. The major drawback of the funded life insurance trust is that the trust income may be taxed if it can be used to pay premiums for a life insurance policy on the life of the grantor or the spouse.

In an unfunded life insurance trust, the trustee has no other property in the trust with which to pay premiums, and the trust is therefore dependent on annual cash gifts from the grantor. For tax reasons, the "unfunded" trust is more commonly used.

Features of the Irrevocable Life Insurance Trust:
The irrevocable life insurance trust is created during the grantor's life. The beneficiaries of the trust are often family members of the grantor - spouse, children, grandchildren, spouses of children and grandchildren.

As mentioned above, the trust is funded with a life insurance policy on the grantor. This may be an existing policy which the grantor gifts to the trust, or it may be a new policy that the trustee acquires with cash transferred to the trust from the grantor.

The grantor usually makes annual transfers of cash to the trust so that the trustee can pay the premiums. Of course, these annual transfers are gifts. Where the trust beneficiaries cannot begin to "enjoy" the policy as soon as the grantor-insured dies, the gifts would ordinarily be future interests. That means no annual gift tax exclusion is available to shelter the annual cash transfers from the federal gift tax.

If the trust beneficiary can get a distribution of the insurance proceeds immediately after the insured dies and the proceeds are paid into the trust, the gift of the policy is a gift of a present interest. Most trusts defer the beneficiary's enjoyment of the proceeds, and thus the gift is of a future interest.

An irrevocable trust is exactly what it says it is - irrevocable.  The information provided here is only on a small part of irrevocable trusts.  Consult an attorney at Haas McNeil & Associates, P.A. to explore all the options in estate planning and ensure that  your family is provided for in the way you intend.