What Is a Flexible Irrevocable Trust?

Estate planning attorneys use a variety of trusts and often recommend irrevocable trusts, according to a recent article from Kiplinger, “Sophisticated Planning with Flexible Irrevocable Trusts.” Irrevocable trusts are commonly used for Special Needs Trusts to help individuals become eligible for Medicaid and veterans’ benefits and to minimize tax liabilities.

The term “irrevocable” can cause concerns for people who are used to maintaining complete control over their assets. However, careful drafting of these documents can allow indirect control over assets, income and ownership, while providing flexibility usually not associated with irrevocable trusts. A flexible irrevocable trust provides the ability to respond to changes in circumstances, a welcome option for many.

How do flexible irrevocable trusts work? Assets are not transferred directly into the irrevocable trust. Instead, they are transferred to a legal entity like a Limited Liability Corporation (LLC), an S-Corporation, or a Family Limited Partnership (FLP) controlled by an individual. An interest in the entity is then transferred to the irrevocable trust. Nonvoting interests in the entity are then transferred to the trust. Done correctly, the individual retains control of both the entity and the asset.

In this situation, the person who is directing the creation of the trust will need to designate the initial trustee who will oversee transactions and activities for the trust. Some people are more comfortable appointing themselves as the initial trustee. However, it’s better in this case if they are not the initial trustee. For instance, if they are the initial trustee for a trust created for their children, distributions will be limited to pay for the health, education, maintenance and support, known as HEMS, if the goal is to exclude assets from the estate for tax purposes.

HEMS distributions, however, could eliminate or impede beneficiary protection from creditors. The creditor could say the beneficiary has a right to the HEMS distribution and take this amount from the trust.

The trustee, when not the individual who created the trust, may have total control to make distributions, which provides better asset protection to the trust’s beneficiaries. You must be 100% certain that the trustee will act on your instructions.

When selecting a trustee, keep two things in mind: while you are living, you want the trustee to follow your instructions, and after your death, you want someone whose judgment you trust implicitly. The best candidate may be an adult child if the family dynamics and history support this decision.

Having the ability to remove the trustee and designate a new one without cause is another critical part of drafting the trust.

If the need to replace the initial trustee occurs, be careful not to select someone who is related to you, a lineal descendent, or an uncle or aunt. Don’t name someone who is an employee of a business of which you own a significant share. While a related or subordinate person may be a successor trustee, they should not be the primary trustee.

These types of trusts require the knowledge of an experienced estate planning attorney. Consult an estate planning attorney if your circumstances warrant a flexible, irrevocable trust.

A flexible irrevocable trust allows for more control and adaptability than a traditional irrevocable trust while still providing key estate planning benefits. At The Werner Law Firm, we help clients establish flexible irrevocable trusts tailored to their specific needs, ensuring both asset protection and the ability to respond to changing circumstances. Our experienced estate planning attorneys will guide you through selecting the right trustee and structuring your trust to maximize tax benefits and safeguard your legacy. Schedule a consultation today to explore how a flexible irrevocable trust can work for you.

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Reference: Kiplinger (Jan. 30, 2025) “Sophisticated Planning With Flexible Irrevocable Trusts.”