A trust can be either inter vivos, meaning it becomes active while you are alive, or testamentary, meaning it takes effect upon your death. Within the inter vivos trust category, a trust can then be either revocable or irrevocable.
Not surprisingly, an irrevocable trust is one that, for the most part, cannot be changed once you have created it. A revocable trust, on the other hand, can be modified, amended or terminated at any time by you once created. Although it is best to think of an irrevocable trust as one that cannot be modified, amended or terminated, most states do have procedures for modification, termination or amendment under specific conditions which typically require court approval.
An irrevocable trust offers certain benefits that a revocable trust does not. Once you place assets into a irrevocable trust, they are no longer considered part of your estate. This generally means they are not considered part of your estate for estate tax purposes and may pass directly upon your death, thereby avoiding probate as well. Beware, however, that transfers made “in contemplation of death” can sometimes be considered part of your estate if made close to the time of death.
In addition, an placing assets into an irrevocable trust may incur a gift tax obligation if the assets are above the lifetime exemption amount. Most importantly, although an irrevocable trust offers attractive tax and probate advantages, it is important to remember that, for the most part, assets you place in the trust cannot be recovered so be sure to consult with your estate planning attorney prior to forming an irrevocable trust.