Advantages and pitfalls of irrevocable trusts

Amaris Elliott-Engel, BridgeTower Media Newswires

ROCHESTER, NY — When an earlier version of the Build Better Act — the $1.75 billion social spending bill being advanced by Democrats in Washington — proposed reducing the federal gift and estate tax exemption from $10 million to $5 million, local trust and estate professionals got a flurry of inquiries from concerned clients about setting up trusts.

While the spectra of changes to the federal gift and estate tax exemption has receded, the current exemption is set to revert back to $5 million as of January 1, 2026, and local experts say it’s never too soon to evaluate if an irrevocable trust is appropriate for one’s circumstances.

“There was a whole bunch of consternation among clients thinking, ‘Boy, I better use that exemption before I lose it,’” says Stephanie Seiffert, a partner at Nixon Peabody specializing in trusts and estates.

But Seiffert notes that the considerations of funding irrevocable trusts because of changes in federal gift and estate tax exemption should still be on people’s minds with the reduction of the exemption scheduled to take place in about four years.

In an irrevocable trust, the grantor is giving up their rights to ownership of the assets transferred into the trust, and the trust can’t be changed or terminated without the consent of the beneficiaries of the trust.

“You can’t amend or change an irrevocable trust without a lot of work,” says Susan Herendeen, division manager for ESL Trust Services, which acts as a corporate fiduciary for irrevocable trusts. “People have to sign off.
Beneficiaries have to agree. Usually, the courts have to agree. There’s a lot that goes into amending an irrevocable trust — if you can amend it. There are times where they will go, ‘Sorry, you can’t amend it. It is what it is.’”

Irrevocable trusts are necessary to be able to garner protection from estate taxes, to be able to qualify for government programs like Medicaid coverage for long-term care and to protect assets from creditors, says Martin O’Toole, a partner at Harter Secret & Emery LLP specializing in trusts and estates.

Herendeen adds that it’s important for people considering irrevocable trusts to consult with a trust and estate attorney, a certified public accountant and a corporate trustee to get advice on whether or not they really need a trust.

“We have to act in our clients’ best interest,” Herendeen says. “If it’s not in their best interest we don’t encourage them to get a trust.”


Different irrevocable trusts

There are various types of irrevocable trusts, local experts say.

For example, there is an irrevocable trust that allows grantors of the trust to qualify for long-term care paid by the government, O’Toole says.

The assets have to be transferred into a trust at least five years before a patient goes into a  nursing home and 2.5 years before a patient needs home care to avoid having those assets, even if transferred into a trust, to render a patient ineligible for care for some period of time, O’Toole says.

Trusts are also set up for charitable purposes, says Cynthia Turoski, a managing partner at Bonadio Wealth Advisors LLC, a certified financial planner and a tax certified public accountant.

Trusts are often set up because minor children can’t inherit money directly, Turoski adds.

Another type of trust is to hold life insurance policies so that funds paid from those policies are not counted for an estate’s federal tax liability.



One consideration of irrevocable trusts is if people even have sufficient funds to gift them into a trust. Clients don’t want to be caught short in terms of the income they have left over after putting assets into a trust, Turoski says.
Turoski also notes that the cost-benefit analysis of setting up irrevocable trusts must include that there are the costs of annual trust tax returns and the fees paid to a professional trustee to administer the trust.

The selection of a trustee is a much more important decision than the selection of an executor for a will, Turoski says, because trustees will have to make decisions over many years. She recommends people consider using a trust professional as well as a co-trustee who may be a family member who can give the perspective on the family.

Another consideration is — if the purpose of the trust is to qualify for Medicaid long-term care, specifically — is if people are OK with having less flexibility in what nursing homes they can go into than they would have as private payers as well as overall quality-of-life considerations, Turoski says.

Furthermore, if a trust is going to be funded with closely funded assets, it is important to have a valuation done of those assets first before putting them into trust, Seiffert says. People have to allow enough time to get through the trust-drafting process and the trust-funding process before hitting a deadline like a change in tax laws.

“It always takes more time than one thinks,” Seiffert says.

Surrendering control

One of the downsides of irrevocable trusts is that the creators of trusts are giving up control of their assets and wealth, O’Toole and Seiffert both say.

“When you transfer assets to the trust, by and large, you lose control of them,” Seiffert says. “Some people don’t understand that, while they gain a big estate tax benefit, they can be a little sorry that they lose control. It’s very important that clients understand and ask enough questions to understand the balance between control and tax benefits.”

O’Toole says that irrevocable means unilaterally irrevocable in terms of only the grantor who creates the trust.

That doesn’t mean trusts aren’t ever changeable, O’Toole says.

“You can give other people besides the grantor the ability to change the terms of the trust in limited ways or fairly broad ways,” he says. “The notion that you have an irrevocable trust doesn’t mean that it’s not changeable.”
A trust protector is someone who is appointed to watch over the trustee and can amend or terminate the trust in certain circumstances, O’Toole says.

O’Toole also says trusts can be drafted so trustees have discretion and grantors also can retain the power of appointment.

In some circumstances, Turoski recommends that the appointed trustees have discretion over whether distributions are made out of the trust to beneficiaries.

This allows the trustee to account for if a beneficiary is getting divorced, if the beneficiary is being sued, if the beneficiary is not being fiscally responsible or if the tax environment would make it more prudent to keep funds in the trust, Turoski says.

One of the ways to mitigate the concerns with an irrevocable trust is to use a “decanting” provision in New York Estate, Powers and Trusts Law Seiffert says. If an irrevocable trust has a provision that allows a trustee to “invade” the trust’s existing principal, a trustee can “decant” the first trust if its purposes have become stale or obsolete because of a change in tax law, among other reasons. The assets of the first trust can be transferred by the trustee to a second trust that better fits a client’s goals, Seiffert says.

Seiffert notes that other states like Delaware and South Dakota have more permissive laws regarding trusts and allow people to set up “directed trusts” in which an investor advisor separate from the trustee can be appointed to control how the trust’s assets are invested.


Amaris Elliott-Engel is a Rochester-area freelance writer.