The flexible irrevocable trust

It’s your money

By Verlyn de Wit

One reason many of our business transactions are irrevocable is to get the tax treatment we desire. Consider that:

• Gifts to charity are not tax deductible if you can take it back later.

• You must “cut all the strings” of  income and enjoyment, or property given to children will be in your taxable estate.

Revocable vs. Irrevocable

I can’t think of any area of the law where the concept of revocable (ability to change or undo) and irrevocable (you get the picture) is more important than in the area of trusts.

For example, assume that your revocable living trust provides a $100,000 gift to your church at your death. You won’t receive a charitable deduction now since you can remove the gift provision from your trust at any time. However, if you place $100,000 in a qualified irrevocable trust, you will receive a charitable deduction today and continue to receive income from the trust even though the money doesn’t pass to charity until your death.

Irrevocable trusts can be powerful!

Leaving “goodies” on the table

Folks have a natural aversion to doing anything irrevocably.  Unfortunately, substantial benefits are sometimes left on the table to avoid the unlikely event of a negative turn of circumstances.

One key area where I have seen people forfeit great gain because of fear of the unforeseen is with life insurance ownership.  Life insurance is taxable in your estate if you own the policy, or have any “incidents of ownership.” These “incidents” may be as small as the ability to borrow from the policy or change its provisions, even if the powers have not been exercised. The penalty of having life insurance included in your taxable estate is huge – up to 45% of the policy death benefit can go to taxes. A $1 million policy can be whittled down to a mere $550,000 with Uncle Sam as the unexpected beneficiary.

The irrevocable rescue

To avoid this disaster, folks need to establish an irrevocable trust as the owner of their life insurance. If properly drafted, this irrevocable trust would save $450,000 in taxes in our example above. But now the questions arise, “What if one of my children goes off the deep end?” or “What if my children need the money in the trust before I die?”  These are good questions that need to be asked.  And you know I wouldn’t ask them unless I had an answer!

Irrevocable and flexible intersect

One key requirement of the irrevocable life insurance trust is that the Grantor (person who establishes the trust, and usually is the person on whom life insurance is purchased) may not change the terms of the trust. It’s like the country song, “What part of irrevocable don’t you understand?”

However, in the last number of years I have seen leading-edge attorneys draft irrevocable trusts that establish the position of “Trust Protector” (TP). All trusts have a trustee, but the TP role is entirely different. The TP can change the terms of the irrevocable trust while it is in operation. The irrevocable becomes flexible.

The provisions which can be changed are limited, and it would probably be best not to have the grantor’s attorney, or a beneficiary of the trust act as the TP. All of this requires competent legal expertise – we are now performing brain surgery on an irrevocable trust!

Here are some of the powers I have seen given to the TP:

• Terminate the trust.

• Impose terms and conditions under which the beneficiaries may receive property.

• Change the beneficiary(ies) of the trust to another trust.

• Modify the financial powers of the trustee.

• Modify the terms of the trust to achieve a desirable tax result.

• Remove the trustee.


The TP may be a new concept to some attorneys, and therefore viewed as “risky”.  So don’t subject your counselor to an immediate on-the-spot exam.  If you want to sound sophisticated and informed perhaps you’ll want to say, “I have reading about using a Trust Protector in an irrevocable life insurance trust, can I come over next week to talk about it?”

Your attorney will probably say, “That’s a good idea, after all, It’s Your Money.”


Verlyn De Wit helps successful dairy producers make smart decisions about their money.  He can be reached toll-free at 1-888-468-1728 by e-mail at or snail-mail at 1270 Eastside Dr., Sioux Center, IA  51250. Securities offered through Sammons Securities Co., LLC. 4261 Park Road, Ann Arbor, MI  48103. Member FINRA and SIPC.

Neither Western DairyBusiness nor Verlyn De Wit is qualified to offer legal or tax advice. Consult your attorney and/or tax professional for a qualified opinion regarding your personal situation.