Questions to Ask About Irrevocable Trusts
Questions to put to an estate planning lawyer before creating an irrevocable trust: what problem it is meant to solve, what control you give up permanently, how it is taxed, what it costs each year, and whether something simpler would do.
The questions
Open any question for the note
What problem would this trust actually solve for me?
Why ask it
There are only a few real reasons to use one: estate tax, long-term care planning, protecting an heir who cannot manage money, or guarding against future claims. If nobody can name which applies to you, you may not need the structure.
How is an irrevocable trust different from a revocable one in practice?
Why ask it
Both keep assets out of probate, so that is not the distinction. The difference is that a revocable trust leaves the assets treated as yours for tax and creditor purposes, and an irrevocable one generally does not.
Which specific type of irrevocable trust are you recommending, and why that one?
Why ask it
Irrevocable trust is a category, not a document. The name of the specific type tells you what it is built to do, and a recommendation with no name attached usually means a template.
Which of my assets would go in, and which should stay out?
Why ask it
What goes in is what you accept losing access to. Retirement accounts, a home you may want to sell, and cash you might need are the usual candidates for staying out, each for a different reason.
What control do I give up on the day it is funded?
Why ask it
Ask in terms of concrete acts: can you sell it, borrow against it, live in it, change who receives it. If the answer is general reassurance about retained flexibility, ask to be shown the clause that provides it.
Can I be the trustee, and if not, who should be?
Why ask it
Acting as your own trustee can undo the tax treatment or the protection you set the trust up for. An unqualified yes deserves a follow-up about which of those two aims is being sacrificed.
If I change my mind in ten years, what are my options?
Why ask it
Some places allow changes by beneficiary agreement, court petition, or moving the trust elsewhere. Ask what would realistically be open to you and what it would cost, not whether change is theoretically possible.
Who pays tax on income the trust earns?
Why ask it
Depending on the drafting, the bill can fall on you personally, on the trust at compressed rates, or on the beneficiaries. Ask for the yearly cash effect, since this is the item clients most often fail to budget for.
Does funding this use up part of my gift or estate tax exemption?
Why ask it
Transfers into an irrevocable trust are generally gifts, and often reportable ones. Ask which return is required, when, and who prepares it, because a missed filing is common and avoidable.
Would my heirs lose the step-up in basis on anything I move in?
Why ask it
Assets held until death often have their tax cost adjusted, which can wipe out capital gains for heirs. Moving an asset with large gains out of your estate may save estate tax while creating an income tax bill instead.
How does this interact with Medicaid, and what is the look-back period in my state?
Why ask it
Transfers made inside the look-back window can delay eligibility rather than protect anything. Ask for the rule in your own state in years, and how it lines up with your likely timeline for needing care.
What does this cost to set up, and what does it cost every year afterwards?
Why ask it
You want the drafting fee, trustee compensation, tax return preparation and any investment charges, as an annual number. A small trust can cost more to run each year than it saves.
What records and filings will the trustee have to keep up?
Why ask it
Administration is the part people underestimate: a separate account, clean records, and a return each year. Ask what happens when a family trustee handles those loosely, because that is how protection gets lost.
What protection does this give against creditors, and what does it not cover?
Why ask it
Protection generally applies to future claims rather than existing ones, and a transfer made under threat can be unwound. If you hear that it defeats creditors you already have, get a second opinion.
What happens if a beneficiary divorces, is sued, or runs up debts?
Why ask it
This asks how the trust behaves in someone else's crisis. Discretionary distribution language and a spendthrift clause are what decide the answer, so ask whether yours contains them.
When and how do beneficiaries actually receive money, and who decides?
Why ask it
Distribution terms are where family conflict eventually surfaces. Ask what happens when a beneficiary asks for money and the trustee says no, and who settles that disagreement.
What happens if the trustee dies, resigns, or turns out to be unsuitable?
Why ask it
Succession usually matters more than the first appointment, since the trust may outlast everyone named in it. Ask who appoints a replacement and whether beneficiaries can remove a professional trustee.
How does this fit with my will, my powers of attorney, and my beneficiary designations?
Why ask it
Plans fail in coordination rather than drafting. Beneficiary designations on retirement accounts and insurance override a will, and a deed that never gets recorded leaves the trust holding nothing.
What is the simplest arrangement that would achieve the same goal?
Why ask it
Every adviser has a preferred tool. Asking for the plainest version that reaches the same result flushes out whether a will, a beneficiary designation, or insurance would be enough.
What do clients most often regret about setting one of these up?
Why ask it
The honest answers are practical: needing money that is no longer reachable, friction over distributions, and yearly costs nobody expected. An adviser with no examples has not been doing this long.
Before you sign anything
Practical guidance for the conversation itself
Preparing for the meeting
Write your goal as one sentence
For instance: keep the house out of reach of care costs, or leave money to a son who cannot manage it. Every clause in the document should serve that sentence, and anything that does not is worth questioning.
Bring the numbers, not just the intention
A list of assets with rough values, how each one is titled, and the beneficiary currently named on each account. Most weak plans come from missing information rather than poor drafting.
Pay for a second opinion
A review fee is far smaller than the cost of unwinding an irrevocable transfer. If two lawyers disagree about whether you need one at all, that disagreement is the most useful thing you will buy.
Splitting the questions across two meetings
First meeting: whether at all
- 1What problem would this trust actually solve for me?
- 2How is it different from a revocable trust in practice?
- 3Which specific type are you recommending, and why that one?
- 4What is the simplest arrangement that would achieve the same goal?
Second meeting: how it would run
- 1Which assets go in, and which stay out?
- 2Who pays tax on the trust's income?
- 3What does it cost to run each year?
- 4What happens if I need this money back?
Words you will hear
- Grantor: the person who creates and funds the trust, which in this case is you.
- Trustee: the person or company holding and managing the assets, obliged to act for the beneficiaries.
- Funding: the separate step of moving assets in. Signing the trust document does not accomplish it.
- Grantor trust: a trust whose income is taxed to you personally rather than to the trust, sometimes by design.
- Spendthrift clause: language stopping a beneficiary's creditors from reaching their share before it is paid out.
- Look-back period: the window before a benefits application during which earlier transfers are examined.
- Step-up in basis: the adjustment to an asset's tax cost at death, which can be lost when assets leave your estate.
What goes wrong
An unfunded trust does nothing
Signing is the easy half. Ask which deeds, account transfers and re-titlings have to happen, who is responsible for each, and by what date. Unfunded trusts are one of the most common failures in estate planning.
Do not start this during a care crisis
Once care is needed within months, most transfer strategies arrive too late and can trigger a penalty period. Ask an elder law attorney what is still available rather than assuming a trust will help.
Be wary of packaged trust sales
Documents offered at free seminars or bundled with an annuity or insurance policy are usually there to sell the product. Engage a lawyer directly and pay the fee.