What irrevocable trust means

When a grantor creates an irrevocable trust and transfers assets into it, they give up legal ownership and control of those assets. Unlike a revocable living trust, which the grantor can amend or dissolve at any time during their lifetime, an irrevocable trust is generally permanent. The assets are owned by the trust, managed by the trustee, and distributed according to the trust document's terms. The grantor cannot unilaterally reach back in and change those terms.

People use irrevocable trusts for several reasons. Removing assets from the grantor's taxable estate can reduce federal estate taxes for large estates. Assets in an irrevocable trust may be protected from the grantor's creditors in certain circumstances. Irrevocable trusts are also used for Medicaid planning, special needs planning for disabled beneficiaries, charitable giving, and a variety of other purposes. Each of these applications carries its own rules and requirements under California and federal law.

It is worth noting that "irrevocable" does not always mean completely unchangeable. California Probate Code and California courts recognize several ways to modify irrevocable trusts, including trustee petitions, trust decanting, and nonjudicial settlement agreements. A trust protector may also have authority to make certain modifications. However, these mechanisms require specific legal procedures, and the trust cannot simply be amended by the grantor's unilateral decision as a revocable trust can be.

Why it matters for trust and probate loans

Specialty lenders can lend against irrevocable trust property in California, though the analysis is more nuanced than for revocable trusts or probate estates. The key questions a lender must answer include: Does the trust document grant the trustee authority to borrow and encumber trust real property? Is there a trust protector who must approve the loan? What are the beneficiaries' interests and do any require specific protections? What happens to the loan if the trustee is replaced?

North Coast Financial has funded trust loans secured by irrevocable trust property throughout California since 1981. The process begins with reviewing the trust certification to confirm the trustee's authority and identify any limitations or conditions. Most well-drafted irrevocable trusts include broad trustee borrowing powers. When they do, the loan process is similar to any other trust loan, with rates from 9.5% to 10.95%, origination of 1.25 to 1.95 points, and funding typically within 8 to 14 business days.

Related terms

See also: Revocable living trust, Trust certification, Trust protector, and our main article on trust loans in California.

Frequently Asked Questions

When does a revocable trust become irrevocable?
The most common trigger is the grantor's death. When a revocable living trust grantor dies, the trust becomes irrevocable and the successor trustee steps in to administer and ultimately distribute the trust assets. Some trusts also contain provisions that make them partially or wholly irrevocable upon other events, such as the grantor's incapacity. The specific terms of the trust document control when and how this transition occurs.
Can the trustee of an irrevocable trust take out a loan without beneficiary consent?
Generally yes, if the trust document grants the trustee borrowing authority and no other provision requires beneficiary consent. Many irrevocable trusts are drafted with broad trustee powers that include the authority to borrow, mortgage, and encumber trust property. However, the trustee's fiduciary duty requires that any borrowing serve the trust's purposes and the beneficiaries' interests. A prudent trustee consults with trust counsel before taking on debt secured by trust real property.
What is the difference between an irrevocable trust and a living trust?
A living trust (also called an inter vivos trust) is simply a trust created during the grantor's lifetime, as opposed to a testamentary trust created through a will. A living trust can be either revocable or irrevocable. Most California living trusts used for estate planning are revocable during the grantor's lifetime and become irrevocable at the grantor's death. So the two terms describe different characteristics of a trust and are not mutually exclusive.