Irrevocable Trust

What Does Irrevocable Trust Mean?

An irrevocable trust is a trust in which the owner of an estate transfers their ownership rights to another party, thereby relinquishing control over the estate. This transfer also exempts the original owner from any tax liability related to the estate. However, once the trust is established, the grantor, or original estate owner, can no longer modify or alter the terms of the trust.

Insuranceopedia Explains Irrevocable Trust

The primary reason people establish irrevocable trusts is to avoid paying taxes. The grantor becomes exempt from taxation because they are no longer the legal owner of the property placed in the trust.

This type of trust is often used for life insurance and is referred to as an irrevocable life insurance trust. Most ILITs are funded with permanent life insurance rather than term policies, since the trust is meant to pay out at the insured’s death whenever that occurs. Under this arrangement, the insurance payout from a death benefit is not considered part of the estate and, therefore, is not subject to taxation. Outside of this estate-tax exemption, whether life insurance is taxable depends on factors like policy ownership and how the proceeds are paid out.