Unlike a Revocable Trust, an Irrevocable Trust is one that may NOT be amended, modified, changed or revoked during the lifetime of the settlor. They are therefore less common than Revocable Trusts. However, they are important tools for some individuals and families, especially for purposes of holding life insurance policies. When properly executed and funded, life insurance policies held by an Irrevocable Trust move outside the estate of an individual. Therefore, when the individual passes away, the value of the life insurance policy is not counted in determining whether the estate surpasses the federal exemption amount for estate tax purposes.
Many families do not realize that their estate for purposes of calculating federal estate tax upon death, includes the payout value of their life insurance policies. This means that sometimes an individual, or a family, goes over the exemption amount without realizing they were going to, and their estate becomes subject to federal estate tax. Placing life insurance policies in an Irrevocable Trust can help prevent this from happening.
It is important to note however that unlike Revocable Trusts, Irrevocable Trusts require their own EIN (Employer Identification Number) and must pay taxes separately from the settlor. This is not the case with Revocable Trusts, where the settlor may pay income taxes on the trust property as part of his or her ordinary personal tax return.