Irrevocable Trust: Which One You Need, What You Give Up, and What You Keep

The question behind every irrevocable trust is the same: why would a competent adult hand assets to a trustee and promise never to take them back? The answer is that the law only stops counting property as yours when you have genuinely stopped controlling it. Medicaid, judgment creditors, and the IRS all apply versions of that test. A revocable trust fails it because you can undo it tomorrow; an irrevocable trust passes it because you cannot.

Four motives account for nearly every irrevocable trust drafted in the United States. The first is long-term care: nursing home care averaged roughly $9,300 a month for a semi-private room in the Genworth Cost of Care Survey (2024), and Medicaid will pay only when countable assets are nearly gone. The second is creditor exposure for physicians, contractors, landlords, and business owners. The third is a disabled beneficiary who would lose public benefits if handed an inheritance outright. The fourth is estate tax, now relevant to few families but still decisive for the ones it touches. Each motive points to a different trust, described below, and families who start with the label rather than the motive routinely buy the wrong one.

What the trust does not do deserves equal weight. It does not let you keep spending the principal as if it were still yours. It does not vanish debts you already owe. It does not shield transfers made after a lawsuit is filed or a nursing home admission is imminent. Every irrevocable trust is a bargain struck in advance, and the earlier it is struck, the more it protects.

Irrevocable trusts are drafted for a purpose, and the purpose dictates the terms. The main members of the family:

• Medicaid asset protection trust (MAPT). Holds the home and savings so they stop counting after the five-year look-back; the grantor typically keeps the right to live in the house and to receive trust income but never principal. This is the workhorse of elder law, and The Medicaid-specific irrevocable trust is covered in full on its own page.
• Irrevocable life insurance trust (ILIT). Owns a life insurance policy so the death benefit is excluded from the taxable estate. Premiums are paid by gifts to the trust, and each gift must be announced to beneficiaries through Crummey notices to qualify for the annual gift exclusion, $19,000 per recipient in 2025 under IRS Rev. Proc. 2024-40.
• Special needs trust. Preserves Supplemental Security Income and Medicaid for a disabled beneficiary by paying for supplemental needs rather than distributing cash. Irrevocable trusts for a disabled beneficiary come in first-party and third-party versions with different payback rules.
• Domestic asset protection trust (DAPT). Self-settled creditor protection, valid under statute in about 20 states as of 2025, including Nevada, South Dakota, Delaware, and Alaska. Irrevocable trusts built for creditor protection are a separate discipline with their own waiting periods.
• Irrevocable funeral trust. A small trust, capped by state law (commonly $10,000 to $15,000), that prepays funeral costs and is exempt for Medicaid in nearly every state.
• Dynasty and spendthrift trusts. Multi-generation trusts that keep inherited wealth outside beneficiaries' estates, divorces, and creditors for as long as state law allows, which in South Dakota and a handful of other states is forever.

Two or more of these often belong in the same plan: a MAPT for the house, an ILIT for a policy, a special needs sub-trust for a grandchild. The drafting question is never whether to use an irrevocable trust in the abstract; it is which combination fits the family in front of us.

Ownership splits in two the moment an asset is transferred into the trust. The trustee holds legal title: the trustee's name goes on the deed, the brokerage account, the bank account. The beneficiaries hold equitable title: the right to benefit from the property under the trust's terms, enforceable in court if the trustee strays. The grantor, having given the property away, holds neither, apart from any specific right the document reserves.

That split is why the trust works. A Medicaid caseworker asks whether the applicant can access the principal; the answer, when the trust is drafted correctly, is no, because the applicant is neither trustee nor beneficiary of principal. A creditor asks whether the debtor owns the asset; the answer is that the trustee does. The IRS asks whether the decedent owned the asset at death; the answer, for an estate-tax-motivated trust, is again no.

Reserved rights are the fine print that decides everything. A grantor may reserve the right to occupy the residence, to receive trust income, to change beneficiaries through a limited power of appointment, or to replace the trustee. Each reserved right is a design choice with consequences: a retained income right is fine for Medicaid but brings the income within reach of a nursing home patient liability calculation; a retained power of appointment keeps the assets in the taxable estate, which is often desirable for basis reasons and irrelevant for estate tax given the current exemption. The drafting attorney's job is to reserve exactly the rights the family needs and not one more.

Irrevocable does not mean untouchable, and understanding the legitimate exits prevents both false hope and unnecessary fear. The exits, in the order families usually encounter them:

• Income distributions. Most Medicaid trusts and many others pay the grantor all income, meaning dividends, interest, and rent. What is locked is the principal.
• Distributions to beneficiaries. The trustee can distribute principal to the named beneficiaries, usually the children, under whatever standard the document sets. A child who receives a distribution may, as a matter of family choice, spend it on a parent's needs. The trust cannot require that, and the Medicaid agency will notice a pattern.
• A trust protector. An independent person, often a professional, granted specific powers such as changing the trustee, amending administrative terms, or updating the trust for new law. Protectors are drafted in from the start or they do not exist.
• Decanting. Pouring the assets of an old irrevocable trust into a new one with better terms, permitted by statute in roughly 30 states as of 2025 including New York, Florida, Texas, and Illinois, subject to limits on changing beneficial interests.
• Beneficiary consent. Under Uniform Trust Code section 411, adopted in most states, a noncharitable irrevocable trust may be modified or terminated if the grantor and all beneficiaries consent, and sometimes by beneficiaries alone if no material purpose is defeated.
• Judicial modification. Courts can modify a trust for unanticipated circumstances or correct mistakes, at a cost in fees and months.

The caution is that every exit used to return principal to the grantor undermines the trust's purpose. A Medicaid agency that sees principal flow back to the applicant will treat the trust as available and count it in full. The exits exist to fix drafting errors and adapt to changed law, not to give the grantor a spare key.

Every irrevocable trust is, for income tax purposes, either a grantor trust or a non-grantor trust, and the choice is made by which powers the drafting attorney includes. Under Internal Revenue Code sections 671 through 679, retaining certain powers, such as the power to substitute assets of equivalent value or to borrow without adequate security, makes the grantor the taxpayer on all trust income even though the assets are no longer the grantor's for Medicaid or creditor purposes. The result is the intentionally defective grantor trust: defective for income tax on purpose, effective for everything else.

Grantor status is usually the right answer for a family trust. The grantor reports the income on their own Form 1040 at individual rates, the trust needs no separate tax payment, and the home inside the trust keeps its principal residence capital gains exclusion of $250,000 per person under section 121. The alternative, a non-grantor trust, files Form 1041 and pays tax at compressed trust brackets that reached the top 37 percent rate at only $15,650 of income in 2025, versus $626,350 for a single individual, per IRS Rev. Proc. 2024-40.

Non-grantor status still has uses. A domestic asset protection trust in a no-income-tax state can shift investment income out of a high-tax state. A trust for grandchildren may be designed to pay its own tax so the grantor's gifts go further. These are deliberate elections made at drafting, and a template that leaves the question unaddressed produces a trust whose tax status is discovered by accident at the first filing season.

Two federal tax rules pull in opposite directions, and the right irrevocable trust honors both. The first is the step-up in basis under Internal Revenue Code section 1014: assets included in a decedent's taxable estate get a new cost basis equal to fair market value at death, erasing the capital gain on a house bought for $80,000 in 1985 and worth $600,000 today. Assets fully given away during life do not get the step-up; the recipient takes the giver's old basis under section 1015.

The second rule is the federal estate tax exemption, $13.99 million per person for 2025, which the July 2025 tax law, the One Big Beautiful Bill Act, set at $15 million per person from 2026 with inflation indexing, rather than allowing the scheduled 2026 drop to roughly $7 million. For the overwhelming majority of families, estate tax is no longer a reason to remove assets from the estate.

The drafting consequence is important and often missed. A Medicaid trust should generally be designed so the home is inside the taxable estate on purpose, through a retained limited power of appointment or a retained life estate, so the children receive the step-up in basis at death while the house still stops counting for Medicaid after five years. Since the estate tax will not apply to a $600,000 estate, keeping the asset includible costs nothing and saves the family the capital gains tax that a plain gift would have created. Side by side with the revocable version, the difference in basis treatment is one of the least understood and most valuable points of the comparison.

Transfers into an irrevocable trust from which the grantor cannot receive principal are treated as gifts for Medicaid purposes, and gifts within the 60 months before an application trigger a penalty period under the Deficit Reduction Act of 2005. The penalty is the total transferred divided by the state's monthly penalty divisor, which tracks the average nursing home cost in that state; divisors in 2025 range from roughly $6,000 to over $16,000 a month depending on the state. A $300,000 house transferred into a trust 30 months before an application would, in a state with a $10,000 divisor, produce 30 months of ineligibility that begin only when the applicant is otherwise eligible and in a facility.

The clock runs from the date the asset is actually retitled, not the date the trust is signed. A trust executed in January but not funded until the deed is recorded in June starts its five years in June. Families who sign and never fund have a document and no protection, which is the single most common failure in this area. How the five-year clock treats trust funding matters enough that we treat the recorded deed and the retitled accounts, not the signed trust, as the completion of the engagement.

Two related points. Retaining an income interest does not stop the transfer of principal from being a completed gift, so the clock still runs. And transfers to a first-party special needs trust for a disabled child, or to a trust solely for a disabled person under 65, are exempt from the penalty under 42 U.S.C. 1396p(c)(2)(B), which is why those trusts can be funded in a crisis when nothing else can.

A home inside an irrevocable trust can be sold; the trustee signs the deed, and the sale proceeds belong to the trust, not the grantor. The trust then holds cash or buys a replacement residence in the trustee's name, and the grantor's reserved right of occupancy carries over to the new property if the document says so. The five-year clock is not restarted by a sale, because the assets never left the trust. Drafting that anticipates a sale, with an express power to purchase a replacement residence and to hold proceeds, avoids a court petition later.

Two practical frictions arise. The first is the capital gains exclusion: if the trust is a grantor trust and the grantor has lived in the home two of the last five years, the $250,000 exclusion under section 121 still applies to the sale. A non-grantor trust loses it, one more reason grantor status is the default. The second is lending: many mortgage lenders will not refinance a property titled in an irrevocable trust, so a family planning to refinance should do it before funding.

Moving to assisted living or a nursing home does not disturb the trust. The occupancy right simply goes unused, the trustee may rent the house and pay the rent to the grantor as income, or sell it and invest the proceeds inside the trust. Contrast the outcome with a house still in the grantor's name, which becomes the subject of a Medicaid lien and, after death, a recovery claim. Keeping the house outside estate recovery is a benefit that arrives only if the deed was moved into the trust years earlier.

Families almost always start with the revocable version, and The revocable living trust most families start with does an excellent job of avoiding probate and managing incapacity. It does nothing for Medicaid, creditors, or estate tax, because the grantor can revoke it. The trade, feature by feature:

• Control. Revocable: total; amend or revoke at will. Irrevocable: surrendered, apart from reserved rights and the exits described above.
• Medicaid. Revocable: assets count fully. Irrevocable: principal stops counting after 60 months from funding.
• Creditors. Revocable: no protection. Irrevocable: protection for third-party beneficiaries everywhere, and for the grantor only in DAPT states.
• Estate tax. Revocable: included in the estate. Irrevocable: included or excluded by design.
• Income tax. Revocable: always a grantor trust. Irrevocable: grantor or non-grantor by drafting.
• Probate. Both avoid it for funded assets.
• Basis step-up. Revocable: yes. Irrevocable: yes if drafted for inclusion, no if drafted as a completed gift.

The practical sequencing for most families over 60 is a revocable living trust for everything, and an irrevocable trust for the home and a defined slice of savings once long-term care becomes a realistic horizon. Doing the second step while healthy is what makes the five-year clock an asset rather than an obstacle.

Market prices for an attorney-drafted irrevocable trust in 2025 span roughly $2,000 to $6,000, with complex asset protection or dynasty trusts running higher, and online templates advertised at a few hundred dollars. The spread reflects three things: the type of trust, the number and kind of assets being retitled, and whether the fee includes the deeds and account transfers that actually fund it. A price that covers a signed document but not a recorded deed has bought the family nothing for Medicaid purposes.

The recurring costs are modest. A grantor trust typically requires no separate tax return. A non-grantor trust files Form 1041 annually, commonly $300 to $1,000 in preparation fees. Professional trustees charge a percentage of assets, often around 1 percent a year, which is why most family trusts name an adult child instead. State recording fees for deeds into the trust are usually under $100.

Measured against what the trust protects, the fee is small. A $400,000 home exposed to two years of private-pay nursing home care at 2024 Genworth rates is a $220,000 problem; the same home inside a properly funded trust five years earlier is not. That arithmetic, rather than the sticker price, is how experienced families evaluate the decision.

The failures repeat with remarkable consistency, and nearly all of them are drafting or funding errors rather than bad law.

• Funding too late, or not at all. A signed trust with the house still in the grantor's name protects nothing. The clock starts at the recorded deed.
• Naming yourself trustee of your own Medicaid trust. Some states permit it with strict limits; most caseworkers treat a grantor-trustee as evidence of control. An adult child or independent trustee removes the argument.
• Retaining too much. A right to principal, a power to revoke, or an unrestricted power to change beneficiaries converts the trust into an available asset. Reserve income and occupancy, not principal.
• Using a generic template across states. Decanting statutes, DAPT recognition, homestead treatment, and Medicaid trust rules differ by state; a Florida trust is not a Texas trust.
• Forgetting Crummey letters. An ILIT whose annual premium gifts were never announced to beneficiaries can lose the gift exclusion, turning routine premiums into taxable gifts.
• Drafting for estate tax that no longer applies. Trusts written before 2018 often give assets away completely, sacrificing the basis step-up to solve an estate tax problem the $15 million exemption has eliminated for the family. Those trusts can often be fixed by decanting.
• Mixing trust and personal funds. Paying the grantor's bills from trust principal, even occasionally, invites Medicaid and creditor challenges.

Our engagement starts with the motive rather than the document. A family protecting a home from nursing home costs is drafted a Medicaid asset protection trust with a reserved occupancy right, a reserved limited power of appointment for basis step-up, grantor trust status, an adult child as trustee, and a trust protector clause. A physician protecting savings from malpractice exposure is drafted a self-settled trust under the statute of a DAPT state, with a different trustee requirement and a different waiting period. A parent of a disabled adult child is drafted a third-party special needs trust with no payback provision. Same word on the cover, three unrelated documents inside.

The package we deliver includes the trust, the deed transferring the residence into it, transfer instructions for financial accounts, the trustee's plain-language duties, the Crummey notice template where an ILIT is involved, and the funding checklist that marks the engagement complete only when title has actually moved. A licensed attorney drafts to your state's current statutes and our legal review director checks the document before delivery. What we need to quote: your state, the assets to be protected, who will serve as trustee, and the problem you are solving. The full sequence from first message to delivered documents is described in the drafting engagement, step by step.