What are the different types of Irrevocable Trusts?

Irrevocable Trusts are a form of trust wherein the grantor has no control anymore over the assets held in it, and when it is established, it cannot be modified or revoked except with the consent of the beneficiaries. There are several types of Irrevocable Trusts, each created for certain needs in estate planning, tax management, and asset protection.

1. Irrevocable Life Insurance Trust (ILIT): This is a trust typically used to hold life insurance policies. Once the life insurance policy ownership is transferred into this trust, it removes the death benefits from the grantor's estate, thereby theoretically reducing estate taxes. The trust may also provide for beneficiaries through the proceeds of such policies.
2. Charitable Remainder Trust (CRT): A CRT enables the grantor to gift assets to a charity and receive income from those assets throughout his lifetime. Upon the death of the grantor, the remaining assets in the trust pass to the named charity. The benefits that this type of trust provides are tax advantages in the form of an immediate charitable deduction and significant reductions in estate taxes.
3. Special Needs Trust (SNT): A special needs trust is a way of providing financial support to a person with a disability without losing eligibility for governmental programs, such as Medicaid or Supplemental Security Income. These trusts ensure the beneficiary can receive additional support while maintaining access to critical public benefits.
4. Bypass Trust (Credit Shelter Trust): This commonly occurs during marriage, whereby the bypass trust, using the estate tax exemption of both spouses, minimizes estate taxes. Part of the estate is kept in the trust upon death of one spouse, in which the surviving spouse has access to the income and the trust's principal is not considered part of the surviving spouse's estate.
5. Dynasty Trust: The dynasty trust is designed to pass wealth across several generations and save in estate taxes. This allows the passing of assets to heirs and beneficiaries at each generational level without the imposition of estate taxes and may last centuries depending on state law.

Each of these Irrevocable Trusts has various advantages and limitations, making it important that the selection of the right one according to goals and circumstances is done under consultation with an estate planning professional.