There are certain irrevocable trusts that are intended to last for only a specific term of years. Two examples are grantor retained annuity trusts (GRATs) and qualified personal residence trusts (QPRTs). “GRATs are a common way for people to minimize taxes on financial gifts to their beneficiaries,” says Ruhe.
Section 457(g)(2) provides, in part, that a trust described in § 457(g)(1) is treated as an organization exempt from federal income tax under § 501(a). Section 457(g)(3) provides that custodial account and contracts described in § 401(f) are treated as trusts under rules similar to the rules under § 401(f).
Trusts can be broadly categorized into four main types: Living Trusts, Testamentary Trusts, Revocable Trusts, and Irrevocable Trusts.
IRC Section 584 provides that any common trust fund that obtains its tax-exempt status from this section of the Code must comply with OCC Regulation 9.18.
Funds received from a trust are subject to different taxation rules than funds from ordinary investment accounts. Trust beneficiaries must pay taxes on income and other distributions from a trust. Trust beneficiaries don't have to pay taxes on principal from the trust's assets.
The IRS must classify your charities as tax-exempt. The charity must be approved by the Internal Revenue Service as tax-exempt in order to receive tax benefits. The trustee of the trust, which can be a named charity or a financial institution, also needs to keep tax records.
The downside of irrevocable trust is that you can't change it. And you can't act as your own trustee either. Once the trust is set up and the assets are transferred, you no longer have control over them, which can be a huge danger if you aren't confident about the reason you're setting up the trust to begin with.
An irrevocable trust offers your assets the most protection from creditors and lawsuits. Assets in an irrevocable trust aren't considered personal property. This means they're not included when the IRS values your estate to determine if taxes are owed.
The two most effective alternatives are (i) to title assets as “Joint Tenants with Rights of Survivorship” and (ii) designating beneficiaries on financial accounts. In many cases, particularly between spouses, an entire estate can be transferred to the other just by utilizing these two methods.
Typically this comes in the form of income taxes which either the trust pays or your heirs pay when they receive distributions. You can mitigate that through the use of an intentionally defective grantor trust, or IDGT. This is an irrevocable trust into which you place assets, again shielding them from estate taxes.
The Loophole - The Intentionally Defective Grantor Trust
This means that the income generated by the trust is taxable to the grantor, but the trust's assets are not included in the grantor's estate for estate tax purposes.
Assets in the trust are subject to federal estate and gift taxes (though no tax may be due if you have a sufficient amount of exemption remaining) only once - when they are transferred to the trust.
The long-favored grantor-retained annuity trusts (GRATs) can confer big tax savings during recessions. These trusts pay a fixed annuity during the trust term, which is usually two years, and any appreciation of the assets' value is not subject to estate tax.
Selecting the wrong trustee is easily the biggest blunder parents can make when setting up a trust fund. As estate planning attorneys, we've seen first-hand how this critical error undermines so many parents' good intentions.
Another key difference: While there is no federal inheritance tax, there is a federal estate tax. The federal estate tax generally applies to assets over $13.61 million in 2024 and $13.99 million in 2025, and the federal estate tax rate ranges from 18% to 40%.
A Living Trust can help avoid or reduce estate taxes, gift taxes and income taxes, too.
With a trust, there is no automatic judicial review. While this speeds up the process for beneficiaries, it also increases the risk of mismanagement. Trustees may not always act in the best interests of beneficiaries, and without court oversight, beneficiaries must take legal action if they suspect wrongdoing.
A revocable living trust will not protect your assets from a nursing home. This is because the assets in a revocable trust are still under the control of the owner. To shield your assets from the spend-down before you qualify for Medicaid, you will need to create an irrevocable trust.
With the new IRS rule, assets in an irrevocable trust are not part of the owner's taxable estate at their death and are not eligible for the fair market valuation when transferred to an heir. The 2023-2 rule doesn't give an heir the higher cost basis or fair market value of the inherited asset.
An exemption trust is a trust designed to drastically reduce or eliminate federal estate taxes for a married couple's estate. This type of estate plan is established as an irrevocable trust that will hold the assets of the first member of the couple to die.
To be organized exclusively for a charitable purpose, the organization must be a corporation (or unincorporated association), community chest, fund, or foundation. A charitable trust is a fund or foundation and will qualify.