Close this search box.

What Is an Irrevocable Trust? (Hint: It’s Not as Bad as It Sounds)

I was recently discussing trusts and their place in estate planning when I was asked, “What is an irrevocable trust? Does that mean it can never be changed?”

“That’s correct,” I responded.

“Oh, that’s terrible,” they said. “I don’t want that.”

Actually, it’s not as bad as it sounds, and an irrevocable trust could be very beneficial in some cases.

Let me explain exactly what an irrevocable trust is. As you can imagine, the word “irrevocable” means unable to revoke; or in regard to a trust, unable to change the wording. This doesn’t sound good until you realize you can make sure the language in the trust works for you and your beneficiaries.

In my opinion, most well-written trusts include five provisions. The first four go by the acronym HEMS, which stands for health, education, maintenance, and support. When a trust includes HEMS, beneficiaries can spend the money on their health, education, maintenance, and support. “Health” and “education” explain themselves, but what do “maintenance” and “support” mean?  It’s pretty open to interpretation. It’s up to the trustee to make those decisions, to say, “Yes, a mortgage payment is maintenance.” Expenses that support an established standard of living can often be justified, so the cost of the family’s annual beach house rental may even be covered, as long as the vacation rental is not above past standards.

I believe a fifth provision should be included in an irrevocable trust too: one that I call “the escape clause.” This states that the trustee can move the money out of the existing trust and into a new trust. The new trust must have the same beneficiaries but can have different language. The escape clause is typically included because we don’t know what tax laws will be in the future. For example, the trust’s language may require the trustee to distribute all the income to the beneficiaries, but then a new law takes effect that would tax 90 percent of the distributions. An escape clause could permit you to move the money out of the old trust into a new trust, which would have the same beneficiaries and include the same HEMS provisions but does not force the trustee to make income distributions when it’s inadvisable.

So the answer to “What is an irrevocable trust?” is not as important as the answer to “What language does my irrevocable trust include?” If you’d like more answers, we’d love to talk to you. Our comprehensive retirement planning approach means we help our clients with everything that impacts retirement planning, from Social Security decisions to estate planning. Contact us today for the answers you need to create a retirement plan that reflects your entire financial life.

Ken Moraif, CFP®, MBA
Senior Advisor at Retirement
Planners of America

Author of Buy, Hold, and SELL! Author Page