Irrevocable Trusts for Estate Planning

Before putting investments into an irrevocable trust, ask three questions: What should it accomplish? What control would you give up? How would it fit your financial plan?

What’s an Irrevocable Trust?

An irrevocable trust is a legal arrangement in which a trustee manages assets for beneficiaries. The person who creates it generally gives up the ability to revoke it freely.

Available modification options depend on the trust document and applicable law. Ask the drafting attorney which powers you would retain and what changes may be possible; the Texas Trust Code provides the state-law framework.

Trust assets are not automatically excluded from the creator's federal taxable estate merely because the trust is irrevocable. Retained powers and the terms of the transfer affect the result. For 2026, the federal estate and gift tax basic exclusion is $15 million per person; prior taxable gifts and a spouse's portability election can affect the amount available. See the IRS estate-tax FAQs.

Revocable Trusts

Revocable trusts generally let the creator retain control and change the arrangement during life, subject to the document and applicable law. Their assets generally remain in the creator's estate for federal estate-tax purposes; inclusion does not mean estate tax will necessarily be owed.

Revocable trusts are not a blanket shield against creditors. They may help with management during incapacity and transfers at death, but signing the document alone does not complete the plan: account titles and funding need to match its instructions.

Why Consider an Irrevocable Trust?

Start with the goal rather than the trust label. You may want instructions for how heirs receive assets, a structure for a beneficiary with special needs, or a strategy for an estate that could face estate tax.

Whether an irrevocable trust supports those goals depends on its terms, your resources and the legal and tax consequences. Asset protection also depends on the arrangement and applicable law; it is not a universal result of placing assets in a trust.

Two points deserve particular attention because they are easy to misunderstand.

A Step-Up in Basis Is Not Automatic

Estate-tax planning and the tax consequences of eventually selling appreciated investments need to be considered together. Moving those investments into an irrevocable trust does not automatically reset their tax cost when the creator dies.

In Revenue Ruling 2023-2, the IRS found no Section 1014 basis adjustment for assets in an irrevocable grantor trust that were not included in the deceased grantor's gross estate under the ruling's facts. Ask your estate attorney and tax preparer to evaluate both the estate-tax and capital-gains consequences before transferring appreciated investments.

Medicaid and Supplemental Security Income

Public-benefit eligibility is a separate planning question. The Social Security Administration explains that certain irrevocable trust assets can still count as resources for SSI, and distributions can affect benefits. Special-needs trusts and Medicaid planning require program-specific and state-specific review with an experienced attorney before funding a trust or making distributions.

Trade-Offs to Review Before Funding a Trust

The main trade-off is control. Assets transferred to the trust may no longer be available for your own spending or future changes in plans, and modification options may be limited.

Legal work, trustee responsibilities and ongoing administration can add cost and complexity. Income-tax treatment depends on the trust's structure; ask your tax preparer who reports the income and whether a separate return is required.

Review cash needs, investment authority, distribution requirements and tax reporting before funding the trust, then revisit the investment plan as circumstances change.

Connect the Trust With Your Investment Plan

A trust's legal structure is only part of the picture. The investments inside it also need to reflect its distribution requirements, beneficiaries' needs and available cash.

Todd Smurl, CFA, can help connect those investment decisions with your personal financial plan, coordinating with your estate attorney and tax preparer. Schedule an introductory meeting with Todd to discuss your situation.

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