In my last “Perspectives” article, I discussed strategies we suggest to clients to protect assets from lawsuits and creditors. One of the more effective strategies mentioned was the use of irrevocable trusts.
Let’s take a deeper dive into the many uses of these trusts to understand the trade-offs between the substantial benefits they can provide versus the disadvantages that must be considered before moving forward with implementation.
What Is an Irrevocable Trust?
An irrevocable trust is a specialized trust that is designed to own and “lock up” assets apart from the grantor who transfers those assets to the trust, thereby giving up their own ownership of the assets forever. When this transfer has been completed, the trust, not the grantor, is the legal owner of the assets. The assets are thereafter managed by the designated trustee of the trust in accordance with the trust provision for the benefit of the trust’s designated beneficiaries.
The core elements of the irrevocable trust (as opposed to a revocable trust) is the irreversibility of the transfer (once made, the transfer cannot go back) and the inability of the grantor (creator) of the trust to modify the terms and conditions of the trust provisions, though changes might be allowed with consent of the beneficiaries or via a court order.
A common use of irrevocable trusts is in estate planning by wealthy families looking to avoid estate taxes and protect assets. By transferring assets to the trust, the value of those assets are excluded from estate tax calculations and the assets are also protected from creditors. Some individuals and couples also utilize irrevocable trusts to help qualify for Medicaid benefits in the future.
These Trusts Offer Many Advantages
Irrevocable trusts are powerful legal tools that may accomplish many objectives for the grantors. These include:
Estate tax savings: Assets within an irrevocable trust are excluded from the grantor’s taxable estate. For those who may have estate values above the current (2025) exemption levels of $13.99 million (or $27.98 for a married couple), transferring assets to such a trust could provide significant estate tax benefits.
Asset protection: For those that wish to protect assets from lawsuits (high-net-worth individuals or certain professionals, such as doctors or celebrities), irrevocable trusts are an effective vehicle.
Preserve government benefits: In cases where a beneficiary may be receiving government assistance, such as disability or special needs benefits, sheltering assets within the trust may help the recipient avoid disqualification from continuing to receive these benefits.
Avoid the probate process: Like other trusts, assets within an irrevocable trust avoid the probate process after a grantor’s death. This may help avoid delays and outside interference with bequests and asset distribution to heirs.
Charitable intentions: Irrevocable trusts are effective tools for charitable giving. Both charitable lead trusts and charitable remainder trusts may be established as irrevocable trusts and provide both estate tax and legacy gifting benefits.
There Are Drawbacks to Consider, However…
As with most advantageous planning vehicles, there are trade-offs to consider.
Loss of asset control: The biggest advantage (non-ownership) is also the biggest disadvantage: loss of control. Once the assets are transferred, it is virtually impossible to access them or exert any influence on how they are managed or administered.
Costs of implementing and administration: As complex legal instruments, establishing such a trust may be costly to be sure it’s done correctly. Improper structure or terms could also be expensive to correct, if at all possible, or tax issues may arise later. In addition, a trustee may need to be compensated for administering the trust.
Medicaid ineligibility: If the transfer rules are not followed carefully, Medicaid benefits may be denied to the grantor/applicant. As mentioned, reversal of the transfer may not be possible; this could place hardships on the grantor or their family in the case of needing custodial or other care.
High tax rates on trust income: Income generated by the assets within the trust and not distributed to beneficiaries is taxed at the highest tax bracket rate. Generally, the irrevocable trust has its own tax ID number and files its own tax return each year.
Loss of step-up in basis: Under a recent IRS revenue ruling (Rev. Rule. 2023-2), assets transferred to an irrevocable trust and not included within a grantor’s estate lose the coveted “step-up in basis” upon the grantor’s death. Previously, this step-up meant the inheritor’s tax basis for the asset would be the value on the date of the grantor’s death (thereby all the accumulated appreciation via the grantor would escape capital gains taxes). Under this revision, however, beneficiaries of the trust who inherit the trust assets could face significant capital gains taxes afterward.
Careful Consideration Is Key to an Effective Strategy
In summary, irrevocable trusts can be effective tools in avoiding estate taxes, meeting charitable intentions and providing asset protection, but must be considered carefully to make sure implementation meets intended goals and objectives, due to their complexity and inflexibility. Working with a team of experienced attorneys, tax professionals, and wealth managers is critical.
Schedule a Conversation About Your Estate Planning Goals
Preserving and protecting your assets requires a thoughtful, well-structured strategy. That’s why it’s smart to partner with a licensed wealth manager who understands both your financial landscape and the specific regulations in your state.
At Anderson Financial Strategies, we help high-net-worth individuals and business owners create personalized asset protection plans that support their long-term goals. Our mission is simple: provide clear, strategic guidance so you can focus on building the life and legacy you want.
If you would like to explore our services for your family or business, please call us at 855-237-4545 to schedule an executive briefing to discuss your goals. Or simply click here to get started now. We look forward to connecting with you!
About Shon
Shon Anderson is president and chief wealth strategist at Anderson Financial Strategies, LLC with over 20 years of experience. As a fiduciary, Shon’s mission is to provide his clients with quality financial expertise along with rapidly responsive service through an honest relationship. He specializes in providing family office-style services to help his clients organize and focus their financial life. Shon graduated from Wright State University with a bachelor’s degree in financial services and an MBA in finance. He is a CERTIFIED FINANCIAL PLANNER® practitioner and holds the Chartered Financial Analyst® (CFA®) certification. His insights have been quoted in leading financial news publications such as CNBC, Yahoo Finance, Fox Business, Consumer Reports, Forbes, Bankrate.com, Investment News, and Kiplinger. Shon serves as president of the CFA Society Dayton as well as on the boards of the Miami Valley Hospital Foundation and Wright State’s planned giving council, and was appointed as a Trustee for Central State University. Shon and his wife, Jessica, reside in Sugarcreek Township, Ohio, and are blessed with triplet daughters, Elizabeth, Bridgette, and Alexandra, along with their son, Jacob, and dogs, Biscuit and Ella. To learn more about Shon, connect with him on LinkedIn.