Irrevocable Trusts in New York: How They Work and When They’re Used

Understanding Irrevocable Trusts

An irrevocable trust is a legal arrangement in which property is transferred to a trust and administered by a trustee according to the terms of the trust agreement. The person who establishes and funds the trust is generally referred to as the grantor or creator. The trustee is responsible for administering the trust property, and the beneficiaries are the people or organizations entitled to benefit from the trust according to its terms. Under New York law, a lifetime trust is irrevocable unless the trust expressly provides that it is revocable. That does not mean every irrevocable trust operates the same way. The rights retained by the creator, the powers given to the trustee, the beneficiaries, and the rules governing distributions can vary substantially from one trust to another. The term irrevocable trust therefore describes a broad category of trusts rather than one specific estate-planning strategy.

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How an Irrevocable Trust Works

Creating the trust agreement is only one part of establishing an irrevocable trust. Property intended to be governed by the trust must also be properly transferred or funded into it. Depending on the trust and the planning objective, assets transferred to an irrevocable trust may include:

• Real estate

• Bank accounts

• Investment accounts

• Life insurance

• Business interests

• Other property appropriate for the particular trust

Different assets require different methods of transfer. Real estate, for example, may require a new deed. Financial accounts may require changes to account ownership or registration. New York law provides that a lifetime trust is valid as to property to the extent the assets have actually been transferred to the trust. This distinction is important because simply signing an irrevocable trust agreement does not automatically cause every asset a person owns to become trust property.

Once property is properly transferred, the trustee manages that property according to the trust agreement.

Exactly what the creator can and cannot do afterward depends on the terms of the trust.

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Common Uses for Irrevocable Trusts

Irrevocable trusts can serve a variety of estate-planning purposes. The appropriate structure depends on what the person creating the trust is trying to accomplish.

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Long-Term Care and Medicaid Planning

Certain irrevocable trusts may be used as part of planning for future long-term care and potential Medicaid eligibility.

The treatment of trust property for Medicaid purposes depends on the type of trust, its terms, the rights retained by the creator, the availability of distributions, and when assets were transferred. This is why a Medicaid Asset Protection Trust is a specialized form of planning. Creating an irrevocable trust or simply transferring property into one does not automatically make the property unavailable for Medicaid purposes.

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View more about Medicaid Planning and Long-Term Care here.

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Estate-Tax Planning

Certain irrevocable trusts may be used to address federal or New York estate-tax exposure.

Depending on the strategy, the objective may involve removing particular property or future appreciation from a taxable estate, managing life insurance proceeds, making lifetime transfers, or accomplishing another tax-planning objective.

But irrevocability alone does not determine whether property is included in a taxable estate.

The trust's terms, the interests retained by the creator, the type of property transferred, and applicable tax law all matter.

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Asset-Protection Planning

Some irrevocable trust structures may provide protection against particular future claims or risks.

But an irrevocable trust is not automatically an asset-protection trust.

Whether property receives meaningful protection depends on the trust structure, who created the trust, who can benefit from it, what rights the creator retained, applicable creditor law, the timing and circumstances of transfers, and the type of claim involved. The planning must therefore begin with the risk being addressed rather than with the assumption that anything labeled “irrevocable” is protected. 

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For more on Asset Protection planning, review our Asset Protection page.

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Planning for Beneficiaries

An irrevocable trust can also be used to control how property is held and distributed for beneficiaries over time.

For example, a trust may be designed to provide for a beneficiary who:

• Is young

• Has a disability or special needs

• Needs assistance managing money

• May face creditor concerns

• Should receive assets over time rather than outright

• Requires long-term financial management

The trustee can continue managing the property according to the standards established in the trust instead of requiring the beneficiary to receive everything directly.

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Specialized Planning

Many specialized trusts are irrevocable because their objectives require the creator to surrender particular rights or establish a legally separate arrangement.

Examples can include:

• Medicaid Asset Protection Trusts

• Irrevocable Life Insurance Trusts

• Special Needs Trusts

• Charitable trusts

• Certain estate-tax planning trusts

• Other specialized trusts designed for particular family, tax, business, or asset-planning objectives

These trusts should not be treated as interchangeable simply because each is irrevocable.

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Control, Flexibility, and the Tradeoffs of an Irrevocable Trust

The potential advantages of an irrevocable trust generally come with tradeoffs.

A revocable trust is designed to give its creator substantial flexibility. The creator can generally amend or revoke it and retain significant control over the trust property. An irrevocable trust is different. Depending on its terms, the creator may give up the ability to:

• Take trust property back whenever desired

• Use trust principal personally

• Change beneficiaries freely

• Control when distributions are made

• Personally manage trust property

• Sell or transfer property without trustee involvement

• Rewrite the trust whenever circumstances change

The particular restrictions depend on the trust. Some irrevocable trusts allow the creator to retain certain powers or benefits without defeating the trust's intended purpose. Others require substantially greater separation between the creator and the property. This balance between control and planning benefit is one of the most important considerations when deciding whether an irrevocable trust is appropriate.

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Choosing and Funding an Irrevocable Trust

An irrevocable trust generally works best when it is created for a clearly defined reason.

The planning process should identify:

• What the trust is intended to accomplish

• Which assets should be transferred

• Which assets should remain outside the trust

• Who should serve as trustee

• Who should benefit from the trust

• What distributions the trustee may make

• What rights, if any, the creator should retain

• How the trust affects the rest of the estate plan

• Tax consequences

• Medicaid or long-term-care consequences where applicable

• How the trust will operate if family or financial circumstances change

Funding is equally important. A well-drafted trust that never receives the assets it was intended to hold may fail to accomplish important parts of the planning objective. For that reason, establishing an irrevocable trust is usually both a document-planning process and an asset-coordination process.

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Irrevocable Trust FAQs

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Can an Irrevocable Trust Be Changed in New York?

Sometimes.

“Irrevocable” does not necessarily mean that a trust can never be changed under any circumstances.

New York law provides mechanisms that may permit an irrevocable trust to be amended, revoked, modified, terminated, or restructured in certain situations. For example, EPTL § 7-1.9 provides a procedure under which a creator may revoke or amend certain trusts with the written consent of all persons beneficially interested, subject to the statute's requirements.

New York law also provides a trust decanting mechanism that may allow a trustee with appropriate authority to appoint trust property into another trust under specified circumstances. Whether any of these options is available depends on the trust, the people involved, the trustee's powers, and the reason for the proposed change.

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Does an Irrevocable Trust Protect Assets From Nursing Home Costs?

Not automatically.

Certain irrevocable trusts are specifically designed for Medicaid and long-term-care planning, but merely placing assets into an irrevocable trust does not make those assets unavailable for Medicaid purposes. New York Medicaid rules examine the actual terms of the trust and the rights retained by the person who created it. If trust property can be paid to or for the benefit of that person, some or all of the trust property may be treated differently from property held in a properly structured trust that restricts access to principal. The timing of transfers can also be important. A Medicaid Asset Protection Trust is therefore a specialized type of irrevocable trust designed around Medicaid rules rather than simply a generic irrevocable trust.

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Does an Irrevocable Trust Avoid Probate?

Assets properly transferred to a lifetime irrevocable trust generally do not pass under the creator's will simply because the creator dies. Instead, the trustee continues to hold or distribute those assets according to the trust agreement.

However, the trust controls only the property actually transferred to it. If the creator signs an irrevocable trust but leaves other assets individually owned without another method of transfer, those assets may still become part of the probate estate.

An irrevocable trust can therefore help keep trust-owned assets outside probate, but the existence of the trust does not automatically eliminate probate for everything the creator owns.

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Does an Irrevocable Trust Reduce Estate Taxes?

It can, depending on the type and structure of the trust. Certain irrevocable trusts are specifically used for estate-tax planning. But simply making a trust irrevocable does not automatically remove the trust property from the creator's taxable estate. Federal and New York estate-tax consequences can depend on the property transferred, the rights and powers retained by the creator, the beneficiaries, the timing and nature of the transfer, and the specific trust structure.

Estate-tax treatment should also be distinguished from income-tax treatment. An irrevocable trust can, in some circumstances, still be treated as a grantor trust for federal income-tax purposes. The word “irrevocable” by itself therefore does not determine the trust's tax consequences.

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Can You Be the Trustee of Your Own Irrevocable Trust?

Sometimes.

Whether the creator can or should serve as trustee depends heavily on the type of irrevocable trust and what the trust is intended to accomplish. Retaining particular powers as trustee may be compatible with one planning strategy while undermining the objectives of another. Important considerations can include:

• The trustee's distribution powers

• The creator's access to trust property

• Medicaid rules

• Estate-tax rules

• Creditor and asset-protection considerations

• The beneficiaries

• The overall purpose of the trust

The better question is therefore not simply “Can I be my own trustee?” but “Would serving as trustee interfere with what this particular irrevocable trust is supposed to accomplish?”

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Sources & Legal References

New York Estates, Powers and Trusts Law § 7-1.16 — Revocation of Lifetime Trust by Will

https://www.nysenate.gov/legislation/laws/EPT/7-1.16

New York Estates, Powers and Trusts Law § 7-1.17 — Execution, Amendment and Revocation of Lifetime Trusts

https://www.nysenate.gov/legislation/laws/EPT/7-1.17

New York Estates, Powers and Trusts Law § 7-1.18 — Funding of Lifetime Trust

https://www.nysenate.gov/legislation/laws/EPT/7-1.18

New York Estates, Powers and Trusts Law § 7-1.9 — Revocation of Trusts

https://www.nysenate.gov/legislation/laws/EPT/7-1.9

New York Estates, Powers and Trusts Law § 10-6.6 — Exercise of Power of Appointment; Trust Decanting

https://www.nysenate.gov/legislation/laws/EPT/10-6.6

New York State Department of Health — Trusts and Medicaid Eligibility

https://www.health.ny.gov/health_care/medicaid/trusts.htm

Internal Revenue Service — Instructions for Form 1041, U.S. Income Tax Return for Estates and Trusts

https://www.irs.gov/instructions/i1041