Is a GST Trust Revocable or Irrevocable?

Estate planning often involves using trusts to manage and transfer assets. These legal arrangements are broadly divided into two categories, revocable and irrevocable, based on the degree of control the creator holds.

Understanding Revocable and Irrevocable Trusts

A revocable trust, also known as a living trust, offers the creator, or grantor, significant flexibility. The grantor can amend the trust’s terms, add or remove assets, or dissolve it entirely during their lifetime. Due to this retained control, the assets within a revocable trust remain part of the grantor’s taxable estate for federal estate tax purposes and are not shielded from creditors.

An irrevocable trust operates differently. When a grantor establishes an irrevocable trust, they permanently relinquish control and ownership of the assets transferred into it. The grantor cannot change the trust’s terms or reclaim the assets. A benefit of this arrangement is that the assets are removed from the grantor’s taxable estate, which can minimize potential estate taxes.

If retaining control and flexibility is the main objective, a revocable trust is suitable. For individuals whose estates may exceed the federal estate tax exemption and who are focused on tax mitigation and asset protection, an irrevocable trust is a more strategic option. The inflexibility of an irrevocable trust is the trade-off for its tax and asset protection benefits.

The Irrevocable Nature of GST Trusts

For a Generation-Skipping Transfer (GST) trust to achieve its tax-planning objectives, it must be structured as an irrevocable trust. The GST tax is a federal tax on transfers of wealth to beneficiaries, such as grandchildren, who are two or more generations younger than the donor. This tax was designed to prevent families from avoiding a layer of estate taxes by “skipping” their children’s generation.

The purpose of a GST trust is to shield assets from this tax. To accomplish this, any transfer of assets into the trust must be a “completed gift” under tax law. A completed gift occurs when the donor fully relinquishes all control over the transferred property, meaning they cannot take it back or alter the beneficiaries’ interests.

This is why a GST trust must be irrevocable. If a trust were revocable, the grantor would retain the power to reclaim the assets, and the IRS would view the transfer as an incomplete gift. By making the trust irrevocable, the grantor ensures the transfer is a completed gift, removing the assets from their taxable estate and making them eligible for protection from the GST tax.

Utilizing the GST Exemption

The effectiveness of a GST trust depends on using the lifetime GST exemption. This is an amount each individual can transfer to “skip persons” without triggering the GST tax. For 2025, the exemption is $13.99 million per individual, but it is scheduled to be reduced by nearly half on January 1, 2026, to an estimated $7 million, adjusted for inflation. By allocating this exemption to assets in an irrevocable GST trust, the assets and their future growth are sheltered from the GST tax.

Allocating the GST exemption is a formal process documented with the IRS on Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return. When a gift is made to the trust, the grantor files this return to report the gift and assign a specific amount of their lifetime GST exemption to that transfer. This action formally records that the trust assets are exempt from future GST tax.

The tax code has rules for the automatic allocation of the exemption to certain transfers to prevent inadvertent tax consequences. The exemption is automatically applied to “direct skips” and transfers to most GST trusts unless the grantor elects out of this treatment on Form 709. A grantor might elect out to save their exemption for a different transfer.

Modifying a GST Trust

While the term “irrevocable” implies permanence, a GST trust is not entirely unchangeable. Although the grantor gives up the right to unilaterally amend the trust, legal mechanisms permit modifications. These methods require a formal process involving other parties or a court, not just the grantor changing their mind.

One method is “decanting,” where a trustee “pours” the assets from an existing irrevocable trust into a new one with more favorable terms. This can be done to update administrative provisions, change the trust’s governing law, or alter distribution standards, if the trustee’s actions are in the beneficiaries’ best interest and comply with state law. Decanting can often be accomplished without court approval.

A non-judicial settlement agreement is another option. This is a contract between the trustee and all beneficiaries to amend certain trust terms, such as interpreting ambiguous language, approving a trustee’s accounting, or changing a trustee. For more significant changes, or if the parties cannot agree, it may be necessary to petition a court for a judicial modification, which is often a more costly process.