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Irrevocable Trusts in Minnesota: Asset Protection, Tax Planning, and Trust Types

An irrevocable trust is a legal arrangement in which the grantor permanently transfers assets out of their personal ownership and into a trust that generally cannot be modified, amended, or revoked after it is established. Unlike a revocable living trust, which the grantor can change at any time, an irrevocable trust represents a completed transfer that removes assets from the grantor’s taxable estate.

This permanent nature is precisely what gives irrevocable trusts their power. By relinquishing ownership and control, the grantor achieves benefits that are unavailable through revocable planning, including asset protection from creditors, reduction of estate taxes, and eligibility for needs-based government benefits.

Why Irrevocable Trusts Exist

An irrevocable trust resolves a fundamental tension in estate planning: the desire to protect assets while minimizing taxes and qualifying for government benefits. Because a revocable trust allows the grantor to retain control, its assets remain part of the taxable estate and are reachable by creditors. An irrevocable trust requires the grantor to give up ownership, and in exchange, the transferred assets are removed from the grantor’s taxable estate for both federal and Minnesota estate tax purposes, are generally protected from the grantor’s creditors, and may be excluded from countable resources for Medicaid eligibility.

Common Types of Irrevocable Trusts

Irrevocable trusts come in many forms, each designed to accomplish specific planning objectives. The following are among the most widely used in Minnesota.

Irrevocable Life Insurance Trust (ILIT)

An ILIT is designed to own a life insurance policy outside of the insured’s taxable estate. Without an ILIT, life insurance proceeds are included in the deceased’s estate for estate tax purposes, even though they pass directly to beneficiaries and avoid probate.

By transferring ownership of the policy to an ILIT, the death benefit is removed from the grantor’s estate entirely. For an individual whose estate exceeds the Minnesota estate tax exemption, this strategy can save tens or even hundreds of thousands of dollars in estate taxes.

Key considerations for ILITs include:

Spousal Lifetime Access Trust (SLAT)

A SLAT allows one spouse to transfer assets into an irrevocable trust for the benefit of the other spouse and their descendants. This removes the assets from the grantor spouse’s estate while still allowing the beneficiary spouse to access trust funds during their lifetime.

SLATs have grown in popularity as a response to the historically high federal lifetime gift tax exemption. Married couples can each create a SLAT (reciprocal SLATs), but these must be carefully structured to avoid the IRS reciprocal trust doctrine, which could collapse both trusts back into the grantors’ estates.

Special Needs Trust

A special needs trust (also called a supplemental needs trust) is designed to provide for a beneficiary with a disability without disqualifying them from needs-based government benefits such as Supplemental Security Income (SSI) and Medical Assistance (Medicaid). Minnesota recognizes third-party special needs trusts (funded by parents or grandparents, with no Medicaid payback requirement), first-party trusts (funded with the beneficiary’s own assets, requiring Medicaid payback at death), and pooled trusts managed by nonprofit organizations. For a detailed discussion of these options, see special needs trusts in Minnesota.

Charitable Trusts

Charitable trusts allow the grantor to benefit both a charitable organization and family members while obtaining tax benefits. A charitable remainder trust (CRT) provides income to the grantor or beneficiaries for a specified period, with remaining assets passing to charity, generating an income tax deduction at creation. A charitable lead trust (CLT) reverses this structure, paying income to charity first, then transferring remaining assets to family members with reduced gift and estate tax consequences. See charitable trusts in Minnesota for a full discussion of these tools.

Dynasty Trust

A dynasty trust is designed to preserve family wealth across multiple generations while minimizing estate tax at each generational transfer. By allocating the grantor’s generation-skipping transfer (GST) tax exemption to the trust, assets can grow and be distributed to children, grandchildren, great-grandchildren, and beyond without being subject to estate tax at each generation.

Recent changes to Minnesota estate planning laws have significantly expanded the potential duration of dynasty trusts. Under the current Minnesota Trust Code (Minn. Stat. Chapter 501C), trusts can now endure for up to 500 years, dramatically extending the horizon for multi-generational wealth preservation compared to the traditional rule against perpetuities.

Asset Protection

One of the primary motivations for creating an irrevocable trust is protecting assets from creditors, lawsuits, and other claims. Once assets are properly transferred into an irrevocable trust, they generally are no longer available to satisfy the grantor’s debts or legal judgments.

However, asset protection is subject to important limitations. Minnesota follows the Uniform Voidable Transactions Act (Minn. Stat. Section 513.41 et seq.), which allows creditors to challenge transfers made with actual or constructive intent to defraud. Assets should be transferred well before any creditor claim arises, and if the grantor retains too much control over trust assets, courts may disregard the trust structure entirely.

Estate Tax Reduction

Minnesota imposes its own estate tax on estates exceeding the state exemption amount, which is significantly lower than the federal estate tax exemption. For estates that exceed the Minnesota threshold, irrevocable trusts can reduce or eliminate state estate tax liability through lifetime gifting (removing assets and future appreciation from the taxable estate), ILITs (excluding life insurance proceeds), and GRATs (grantor retained annuity trusts, which transfer excess growth to beneficiaries free of gift and estate tax when assets outperform the IRS assumed rate of return).

Medicaid Planning

For individuals concerned about long-term care costs, irrevocable trusts can play a role in Medicaid planning. Medical Assistance (Minnesota’s Medicaid program) imposes strict asset limits for eligibility. By transferring assets into an irrevocable trust, those assets may eventually be excluded from the applicant’s countable resources.

However, Medicaid planning with irrevocable trusts is subject to significant constraints:

The 60-Month Lookback Period

Minnesota Medical Assistance imposes a 60-month (five-year) lookback period for asset transfers. Any assets transferred for less than fair market value within 60 months of a Medical Assistance application will result in a penalty period during which the applicant is ineligible for benefits. The penalty period is calculated by dividing the value of the transferred assets by the average monthly cost of nursing home care.

This means that Medicaid planning with irrevocable trusts must be done well in advance of any anticipated need for long-term care. Last-minute transfers are not only ineffective but can leave the applicant in a worse position than if no transfer had been made.

Trust Structure Requirements

Not all irrevocable trusts are effective for Medicaid purposes. The trust must be structured so that the grantor has no access to the trust principal. If the trust terms allow any distributions to or for the benefit of the grantor, the entire trust corpus may be considered a countable resource.

Minnesota Trust Law: 2025 Changes

The Minnesota Trust Code, codified in Minn. Stat. Chapter 501C, has introduced several changes that affect irrevocable trust planning:

Extended Trust Duration

Minnesota now permits trusts to last up to 500 years, a dramatic expansion from the prior common law rule against perpetuities that generally limited trust duration to approximately 90 years (a life in being plus 21 years). This change makes Minnesota a more attractive jurisdiction for dynasty trust planning.

Trust Decanting

Minnesota’s decanting provisions allow a trustee to distribute assets from an existing irrevocable trust into a new trust with modified terms. This powerful tool can be used to:

Decanting does not require court approval in most cases, though trustees must comply with notice and fiduciary duty requirements.

When Irrevocable Trusts Make Sense

Irrevocable trusts involve a permanent transfer of ownership and control, which is a significant commitment. However, they are valuable when estates exceed the Minnesota or federal estate tax exemptions, when business owners or professionals face liability exposure, when a family member with a disability needs supplemental support without jeopardizing government benefits, when significant life insurance needs to be excluded from the taxable estate, when long-term care planning requires Medicaid qualification (with at least five years of advance planning), and when families seek to preserve wealth across generations through dynasty trusts.

The Role of Professional Guidance

Irrevocable trusts are among the most powerful but also the most complex tools in estate planning. Once established, they are difficult or impossible to undo. An experienced estate planning attorney can evaluate whether an irrevocable trust is appropriate, recommend the most suitable trust type, ensure compliance with Minnesota and federal law, and coordinate the trust with the client’s broader estate plan. For a comparison of trust types, see wills vs. trusts in Minnesota.