The Pros and Cons of an Irrevocable Trust: Is It the Right Choice for You?
An irrevocable trust can be a powerful estate planning tool, offering benefits such as creditor protection, estate tax advantages, and Medicaid eligibility planning. However, it also comes with significant limitations that should be carefully considered before making a decision. Below, we explore the key pros and cons of an irrevocable trust to help you determine whether it aligns with your financial and estate planning goals.
Pros of an Irrevocable Trust
1. Protection from Creditors
One of the main advantages of an irrevocable trust is its ability to shield assets from creditors. Since the assets are no longer in your direct control or legal ownership, creditors cannot claim them in lawsuits or bankruptcy proceedings. This makes it an effective strategy for asset protection.
2. Estate Tax Reduction
For individuals with substantial estates, an irrevocable trust can help mitigate estate tax liability. While the current federal estate tax exemption is $13.99 million per person (as of 2025), Washington state has a much lower exemption amount ($2.193 million person as of 2025) before estate tax is levied. Colorado and Idaho, along with many other states, follow the federal limit for estate tax purposes.
Assets placed in an irrevocable trust are removed from the taxable estate, ensuring that any growth on those assets is not subject to estate tax at death.
3. Medicaid Eligibility Planning
An irrevocable trust can also play a crucial role in Medicaid planning for long-term care. When determining eligibility for Medicaid, assets in an irrevocable trust are typically not counted as a resource to the individual applying for benefits, provided they were transferred into the trust at least five (5) years before applying. This allows individuals to preserve wealth for their heirs while still qualifying for government assistance with nursing home or long-term care costs.
Cons of an Irrevocable Trust
1. Loss of Control Over Assets
One of the biggest drawbacks of an irrevocable trust is that the grantor (the person creating the trust) must relinquish control over the assets placed in it. A trustee—who must be someone other than the grantor—manages the trust, and the grantor cannot dictate how the trustee handles the assets. This lack of control can be a significant downside for those who want to retain decision-making authority over their wealth.
2. Lack of Flexibility
As the name suggests, an irrevocable trust is, by design, permanent. Once assets are placed into the trust, changes cannot be easily made without potentially losing the legal protections the trust provides. This rigidity can be a disadvantage if financial or family circumstances change in the future.
3. Loss of Stepped-Up Basis for Heirs
A major tax disadvantage of an irrevocable trust is that heirs lose the ability to receive a "stepped-up basis" on inherited real estate. Normally, when an individual inherits property, its tax basis is stepped up to the fair market value at the time of the decedent’s death, reducing potential capital gains taxes if the property were to be sold. However, if the property is transferred into an irrevocable trust during the grantor’s lifetime, the stepped-up basis does not apply, which could result in a higher capital gains tax burden for your beneficiaries.
Final Thoughts
An irrevocable trust offers substantial benefits, particularly for asset protection, tax reduction, and Medicaid planning. However, the trade-offs—such as the loss of control, lack of flexibility, and potential tax disadvantages—must be carefully weighed.
Before deciding to create an irrevocable trust, consult with an experienced estate planning attorney or financial advisor to determine whether it aligns with your long-term goals and financial situation.