Understanding Flexible Irrevocable Trusts: Combining Control and Protection

Estate planning often involves using different types of trusts to protect assets and minimize tax liability. One option gaining popularity is the flexible irrevocable trust, which combines the protection of an irrevocable trust with the ability to adapt to changing circumstances. While the term “irrevocable” suggests a lack of control, a well-structured flexible irrevocable trust allows for strategic oversight and adjustments when needed.

Here’s how flexible irrevocable trusts work and why they may be a valuable tool in your estate plan.

How Flexible Irrevocable Trusts Work

Unlike traditional irrevocable trusts, assets in a flexible irrevocable trust are not transferred directly into the trust. Instead, the assets are first transferred to a legal entity, such as:

• Limited Liability Corporation (LLC)
• S-Corporation
• Family Limited Partnership (FLP)

An interest in the entity is then transferred to the irrevocable trust, with nonvoting interests held by the trust. This structure allows the individual who created the trust to maintain control over both the entity and the underlying assets.

By setting up the trust this way, the individual retains indirect control over the assets while securing the legal and tax advantages of an irrevocable trust.

Choosing a Trustee for a Flexible Irrevocable Trust

Selecting the right trustee is critical to ensuring the trust functions as intended. The person who creates the trust must appoint an initial trustee to oversee transactions and manage trust activities.

• While some people prefer to appoint themselves as the initial trustee, this can limit the trust’s ability to protect assets from taxes and creditors.
• If the trust is created for children, distributions are typically limited to cover Health, Education, Maintenance, and Support (HEMS) to ensure the assets are excluded from the taxable estate.
• However, HEMS distributions could expose the trust to creditor claims if the beneficiary’s right to the distribution is challenged.

To maximize protection, it's often better to appoint a trusted third party or professional as the initial trustee rather than the individual creating the trust.

Maintaining Flexibility and Control

One of the defining advantages of a flexible irrevocable trust is the ability to adjust terms or trustees as needed:

• The trust creator should retain the right to remove and replace the trustee without needing to state a cause.
• When selecting a successor trustee, avoid appointing someone who is:
  • A lineal descendant (child, grandchild, etc.)
  • A close relative like an uncle or aunt
  • An employee of a business where you hold a significant ownership stake

A successor trustee who is independent of the trust creator ensures better protection from creditor claims and tax issues.

Advantages of Flexible Irrevocable Trusts

- Asset Protection – Protects assets from creditors and lawsuits.
- Tax Efficiency – Reduces estate taxes by excluding assets from the taxable estate.
- Flexibility – Allows changes to trustees and terms to reflect evolving financial or family circumstances.
- Control – Retains indirect control over assets without compromising the legal protections of an irrevocable trust.

Key Considerations When Creating a Flexible Irrevocable Trust

• Ensure the trustee understands your goals and will follow your instructions.
• Maintain the right to replace the trustee if circumstances change.
• Work with an experienced estate planning attorney to structure the trust properly and avoid tax or legal issues.

A flexible irrevocable trust provides a balance of control and protection, making it a powerful estate planning tool. At The Werner Law Firm, our experienced estate planning attorneys can help you design a trust that meets your specific needs and safeguards your legacy. We’ll guide you through the process of selecting the right trustee and structuring the trust to maximize tax benefits and asset protection.

If you have any questions, schedule a free appointment with us through our online appointment page.

You can also read reviews from some of the hundreds of clients we have helped over the years.

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