Irrevocable Trust: Utilize The Current Tax Exemption Before It Expires

Irrevocable Trust: Utilize The Current Tax Exemption Before It Expires
The federal estate tax exemption will expire December 31, 2025. When that happens, the exemption will be cut in half and adjusted for inflation. New tax legislation could possibly be enacted between now and then, but don’t bank on that. Instead, be proactive about your irrevocable trust exemption and act now.

What Is An Irrevocable Trust?

An irrevocable trust allows a grantor to give up ownership of their assets to a designated beneficiary. This gives the beneficiary power over the designated assets. However, after an irrevocable trust has been established, it cannot be canceled or changed by the grantor. Authority and ownership over the trust is forfeited by the grantor, and is not allowed to make any amendments to the terms of the trust without the beneficiary’s permission. But amendments or changes can also be made by a court order. A trustee (third-party member), is responsible for overseeing and managing an irrevocable trust.

Why Set Up An Irrevocable Trust?

Generally, assets become exempt for the grantor’s taxable estate when held in an irrevocable trust. As such, the grantor’s tax liability is decreased, especially if they have a large estate. Additionally, the public is not informed of the irrevocable trust’s assets nor the terms of the trust. Another reason to set up an irrevocable trust is that it is not subjected to probate.

Utilizing Your Irrevocable Trust Tax Exemption

As stated at the beginning of this article, tax exemption will expire for irrevocable trusts in two years. So, use it or lose it. While the exemption is currently set to drop at the end of 2025, a political change in administration could accelerate that drop.

The amount of assets that you can pass free of tax at death is known as the federal estate tax exemption. Currently, the exemption is $12,920,000 per person. Any assets left at death that exceed the exemption are taxed at a rate of 40%. However, this does not include assets left to a spouse or charities.

Annually, the exemption is to adjust upwards for inflation, and then be reduced by 50% at the end of 2025. Unfortunately, this scheduled reduction may get moved up in time following the upcoming election.

For these reasons, you may want to be proactive and take advantage of the current irrevocable trust tax exemption before it drops by using it to make gifts. But hedging a drop in the exemption is not the only reason as gifts also enable you to protect subsequent appreciation from the estate tax.

So, what happens if you make a gift to an irrevocable trust? Well, for starters, you can still utilize your exemption as well as avoid negative consequences of an outright gift.

Here are more perks of gifting to an irrevocable trust:

  • The 40% estate tax rate at the beneficiary’s death can be avoided depending on how the irrevocable trust is structured.
  • You can select the terms of the trust during its initial creation. For example, you could stipulate how and when a beneficiary will have access to the trust assets.
  • Generally, irrevocable trust assets are not available to a beneficiary’s creditors.


Looking for an expert accounting and tax firm to sort out your finances? Look no further. If you’re facing a potential irrevocable trust tax exemption liability at death, making a gift to an irrevocable trust can provide varies benefits. In addition to utilizing your estate tax exemption, you can also incorporate asset protection planning for your beneficiaries. Plus, leverage the gift further with grantor trust status.

Ready to get started? Meet with one of our estate & trust planning advisors to see if your money could be working harder for you.

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