Tennessee Irrevocable Trusts: Protect Assets, Avoid Probate

What Is an Irrevocable Trust in Tennessee?

An irrevocable trust is a legal arrangement where a grantor transfers assets to a trustee and gives up the unilateral right to revoke or amend the trust. After funding, the trustee manages assets for beneficiaries under the trust terms and Tennessee law. Because the grantor relinquishes control, irrevocable trusts may offer enhanced asset protection and potential tax planning benefits compared to revocable trusts.

Why Families Consider Irrevocable Trusts

• Asset protection: Properly structured and funded trusts can help protect assets from certain future creditor claims, subject to spendthrift rules, creditor rights, and the Tennessee Uniform Voidable Transactions Act (Tenn. Code Ann. § 66-3-301 et seq.).
• Probate avoidance: Assets titled in the name of a trust are generally administered outside probate, promoting privacy and continuity (UT Extension PB1755).
• Estate and gift planning: Shifting appreciating assets to a trust can remove future growth from the taxable estate and facilitate lifetime gifts under federal rules.
• Special needs planning: Special needs trusts can preserve means-tested benefits while improving quality of life (42 U.S.C. § 1396p(d)(4)).
• Long-term care planning: Certain irrevocable trusts are used in Medicaid planning, subject to the five-year look-back and trust rules (42 U.S.C. § 1396p(c)–(d)).

Key Tennessee Law Features

• Spendthrift protection: Tennessee recognizes spendthrift provisions that can limit most creditor access to a beneficiary’s interest, with statutory exceptions (§ 35-15-502; § 35-15-503).
• Directed trusts and protectors: Powers to direct trustee actions and use of trust advisors/protectors are permitted if authorized (§ 35-15-808).
• Modification tools: Certain irrevocable trusts may be modified or terminated in limited circumstances by consent, court order, or decanting (§ 35-15-411; § 35-15-412; § 35-15-415; § 35-15-816).
• Domestic asset protection trusts (DAPTs): Tennessee permits self-settled DAPTs when statutory criteria are met (Tenn. Code Ann. § 35-16-101 et seq.).

Irrevocable Trust vs. Revocable Trust

• Control: Revocable trusts remain changeable by the grantor; irrevocable trusts generally do not.
• Tax and creditor exposure: Revocable trust assets are typically treated as the grantor’s for tax and creditor purposes; irrevocable trusts may differ based on retained powers and design.
• Probate: Both can avoid probate for properly titled assets; irrevocable trusts can add asset protection and transfer tax planning at the cost of flexibility.

Common Tennessee Irrevocable Trust Types

• Spousal lifetime access trusts (SLATs)
• Irrevocable life insurance trusts (ILITs)
• Special needs trusts (first-party and third-party) (42 U.S.C. § 1396p(d)(4))
• Charitable remainder and charitable lead trusts
• Domestic asset protection trusts (Tennessee investment services trusts)
• Medicaid-focused trusts, where appropriate, subject to TennCare rules

Trustee Duties and Administration

A Tennessee trustee owes fiduciary duties of loyalty, prudence, impartiality, and adherence to the trust terms and the Tennessee Uniform Trust Code. Core responsibilities include:

• Taking custody of and prudently investing trust property (§ 35-15-804; UPIA § 35-14-101 et seq.)
• Acting with loyalty and impartiality (§ 35-15-802; § 35-15-803)
• Keeping records and providing required information and accountings (§ 35-15-810; § 35-15-813)

Funding Your Irrevocable Trust

Creating the document is only the first step. To realize intended benefits, assets must be retitled or assigned to the trustee. Common assets include investment accounts, closely held business interests, life insurance (via ILITs), and real estate. Each has specific transfer mechanics, tax considerations, and potential creditor and homestead implications. Deeds, assignments, beneficiary designations, and insurer forms must be correctly completed.

Taxes: What to Know

• Income tax: Depending on drafting, an irrevocable trust may be a grantor trust (taxed to the grantor) or a separate taxpayer with compressed brackets (26 U.S.C. §§ 671–679; 26 U.S.C. § 1(e)).
• Gift and estate tax: Transfers can be taxable gifts; estate inclusion turns on retained powers or incidents of ownership (e.g., life insurance under 26 U.S.C. § 2042).
• Tennessee estate/inheritance tax: Tennessee repealed its inheritance tax for decedents dying on or after January 1, 2016; federal rules still apply (Tennessee Department of Revenue).

Medicaid and Long-Term Care Planning

Irrevocable trusts can play a role in planning for long-term care costs. Whether a trust is countable for eligibility, and how transfers or distributions are treated, depends on trust terms, timing, and program rules, including the five-year look-back (42 U.S.C. § 1396p(c)–(d)). Early planning expands options.

FAQ

Does an irrevocable trust always protect assets from creditors?

No. Protection depends on compliant drafting, timing, funding, spendthrift provisions, and absence of voidable transfers. Certain claims can still reach assets under Tennessee law.

Can I be my own trustee?

Sometimes, but retaining too much control can affect asset protection and tax outcomes. Many plans use an independent trustee or co-trustee.

Will my heirs avoid probate?

Assets properly titled in the trust are generally administered outside probate, though some post-death filings and administration are still required.

Can an irrevocable trust be changed?

In limited circumstances through consent, court order, decanting, or actions by a trust protector if authorized by Tennessee statutes and the instrument.

How We Help

We design, draft, and fund Tennessee irrevocable trusts aligned with goals such as asset protection, probate avoidance, tax efficiency, special needs planning, business succession, and charitable giving. We coordinate with your financial, insurance, and tax advisors and support trustees and beneficiaries during administration.

Next Steps

• Clarify objectives and family considerations
• Inventory assets and current titling
• Discuss timelines, tax posture, and creditor context
• Select trustee, protector, and successors
• Draft, sign, and fund; update related estate documents
• Set an administration and review schedule

Ready to discuss your plan? Schedule a consultation.

Disclaimer (Tennessee): This post provides general information about Tennessee law and federal rules as of the review date. It is not legal, tax, or financial advice and does not create an attorney-client relationship. Consult a licensed Tennessee attorney about your circumstances.