Irrevocable vs. Revocable Trusts: Which Protects Your Assets Better?

Key Takeaways: Irrevocable vs. Revocable Trusts 💡

1. Does a revocable trust protect my assets from creditors? No. Not even a little. Assets in a revocable trust remain vulnerable to creditors and lawsuits because you still own and control them.

2. Does an irrevocable trust help with Medicaid? Yes — but only if you plan at least five years ahead. Federal law imposes a 60-month lookback period, and any assets transferred within that window can trigger penalties.

3. What’s the 2026 estate tax exemption? $15 million per person, or $30 million for married couples — permanently increased and indexed for inflation going forward.

4. Can I change a revocable trust later? Yes. You can amend it, add or remove beneficiaries, swap assets, or revoke it entirely during your lifetime.

5. Can I change an irrevocable trust? Generally no. Once established, the terms cannot be cancelled or changed, and the assets no longer belong to you.

6. Which trust avoids probate? Both. Any properly funded trust — revocable or irrevocable — bypasses the probate court process entirely.

7. Which is more expensive to set up? Irrevocable trusts generally start around $3,000 and can reach $10,000 or more due to their complexity, while revocable trusts typically run $1,500 to $4,000.

8. Do I lose the step-up in basis with an irrevocable trust? Potentially. IRS Revenue Ruling 2023-2 confirmed that assets in an irrevocable trust not included in the grantor’s taxable estate do not receive a step-up in basis, meaning heirs may face significant capital gains taxes.

9. Do most people actually need an irrevocable trust? With the 2026 exemption at $15 million per person, most Americans don’t need one for tax purposes alone. Most people choose revocable trusts unless they’re high-net-worth individuals seeking to maximize their exemption.

10. Can I have both? Absolutely. Many estate plans use a revocable trust as the primary vehicle and layer irrevocable trusts for specific purposes like life insurance, Medicaid planning, or generational wealth transfer.

🔓 1. A Revocable Trust Gives You Total Control — but Zero Protection from Anyone Coming After Your Money

This is the single most misunderstood aspect of revocable trusts, and the misconception costs families enormously. A revocable living trust is essentially you wearing a different hat. You create the trust, you fund it with your assets, you serve as trustee, and you can change or dissolve it at any time during your lifetime. For legal and tax purposes, a revocable trust is considered a “disregarded entity” — the IRS acts as if the trust doesn’t exist, and all income is reported on your personal tax return.

This flexibility is the revocable trust’s greatest strength and its most dangerous weakness simultaneously. Because you maintain complete control, every creditor, lawsuit plaintiff, divorcing spouse, and government agency treats those assets as yours. Assets in a revocable trust offer no asset protection — they’re vulnerable to creditors and lawsuits, counted in your taxable estate, and offer no Medicaid protection.

So what does a revocable trust actually do well? Three things, and three things only: it avoids probate, it provides privacy, and it enables seamless incapacity planning.

Probate typically takes 9 to 18 months to complete, while trust administration can often be wrapped up in 3 to 6 months. And the cost difference is dramatic — for a $500,000 estate, will-based probate might cost heirs $15,000 to $35,000, while trust settlement for the same estate might only cost $5,000 to $10,000.

💡 Critical tip: If your primary concern is protecting assets from lawsuits, creditors, or long-term care costs, a revocable trust alone will not help you. It’s an administrative and probate-avoidance tool — not a shield. Don’t let anyone sell you a revocable trust as “asset protection.” That’s what irrevocable trusts are designed for.

🔒 2. An Irrevocable Trust Is the Nuclear Option — Maximum Protection, but You Surrender the Keys Forever

If a revocable trust is a flexible container you control, an irrevocable trust is a locked vault where you hand the keys to someone else and walk away. Once the trust has been created, the terms cannot be cancelled or changed, and once assets are transferred in, they no longer belong to you, nor can you regain ownership of them.

That sounds terrifying, and for good reason — it should give you pause. But that permanent transfer of ownership is precisely what creates the protection. Because you no longer own those assets, they can’t be seized by your creditors, included in your taxable estate, or counted by Medicaid when calculating your eligibility for long-term care benefits.

Irrevocable trusts are typically the better choice when you want to reduce federal estate taxes, need asset protection from creditors or lawsuits, or are planning for long-term care and Medicaid eligibility.

However, the 2026 tax landscape has changed the math dramatically. With the estate tax exemption now at $15 million per person, or $30 million for married couples, there’s potentially less incentive to create irrevocable trusts purely for estate tax avoidance. If your total estate falls well below those thresholds, you may be surrendering control of your assets for a tax benefit you don’t actually need.

But don’t dismiss irrevocable trusts just because of the high exemption. Tax avoidance is only one of their purposes. Asset protection and Medicaid planning remain critically important regardless of your estate’s size.

💡 Critical tip: If your estate is worth $22 million in 2026, you might choose to put $7 million in an irrevocable trust while the remaining $15 million stays in a revocable trust, fully sheltered by the exemption. This layered approach gives you both protection and flexibility where each matters most. Work with an estate attorney who understands the new exemption levels before committing assets you can never reclaim.

⚠️ 3. The IRS Quietly Changed the Rules on Inherited Assets — and Most Irrevocable Trust Owners Have No Idea

This is the stealth development that should have every irrevocable trust holder picking up the phone to call their estate attorney immediately.

IRS Revenue Ruling 2023-2 states that assets in an irrevocable trust not included in the grantor’s taxable estate cannot receive a step-up in basis. This means beneficiaries may inherit assets with the grantor’s original purchase price rather than the fair market value at the time of death.

Let’s make this concrete with an example. Suppose someone transfers assets with a basis of $3 million into an irrevocable trust. At death, those assets are valued at $7 million. Under the old assumption, heirs would inherit at the $7 million stepped-up basis and owe no capital gains tax. Under Revenue Ruling 2023-2, if those assets weren’t included in the taxable estate, heirs inherit at the original $3 million basis — and owe capital gains tax on $4 million of gains when they sell.

At the current long-term capital gains rates, that’s potentially hundreds of thousands of dollars in taxes that the irrevocable trust was supposed to help avoid.

However, if the trust is worded so that the assets are included in the grantor’s taxable estate, the tax burden may be reduced — because inclusion in the taxable estate triggers the step-up in basis at death. This creates a paradox: the very feature that makes irrevocable trusts valuable for estate tax purposes (removing assets from your estate) now works against beneficiaries for income tax purposes (losing the step-up).

💡 Critical tip: If you created an irrevocable trust before 2023, have your estate attorney review the trust language immediately. Some irrevocable trusts include provisions — such as a general power of appointment — that intentionally pull assets back into the taxable estate specifically to preserve the step-up in basis. With the 2026 exemption now at $15 million, you may be able to include assets in your estate, receive the step-up, and still owe zero estate tax because you’re under the exemption threshold. That’s the best of both worlds, but it requires precise legal drafting.

🏥 4. Medicaid Will Take Everything You Own — Unless You Planned Five Years and One Day Ago

This is the section that matters most to the vast majority of families who aren’t worried about estate taxes but are terrified about the cost of nursing home care wiping out their life savings.

Here’s the brutal math: the median annual cost of a private nursing home room in the U.S. exceeds $100,000. In 2026, most states have a Medicaid income limit of $2,982 per month for a single senior applying for long-term care. To qualify for Medicaid to cover nursing home costs, you essentially need to be nearly broke — or appear that way on paper.

A revocable trust does nothing here. If the assets are in a revocable trust, Medicaid considers them to still be owned by the applicant because they still have control. Therefore, the assets are counted toward Medicaid’s asset limit.

An irrevocable Medicaid Asset Protection Trust, by contrast, removes assets from your ownership entirely. But there’s a massive catch. The Medicaid lookback period is generally 60 months (5 years), and all financial transactions within that window are subject to review. If Medicaid determines you transferred assets to avoid the spend-down requirement during that period, they impose a penalty that forces you to self-pay for care.

And here’s the detail that trips up almost everyone: the federal gift tax exemption of $19,000 per recipient in 2026 does not extend to Medicaid’s rules — gifting under this IRS exemption still violates the Medicaid lookback rule.

💡 Critical tip: The best time to establish a Medicaid Asset Protection Trust is at least five years before applying for Medicaid while the grantor is still in good health. If you wait until a health crisis strikes, it’s too late. The five-year clock starts ticking the day assets are transferred into the irrevocable trust — not the day the trust is created. Every month you delay is a month added to your potential penalty period. Also note that California is unique: by July of 2026, California plans to phase out the Medicaid lookback period altogether, making it one of the most protective states for asset planning.

💰 5. The $15 Million Exemption Changed Everything — Most Americans No Longer Need Irrevocable Trusts for Tax Purposes

Before July 2025, estate planners were in a panic. The enhanced estate tax exemption from the 2017 Tax Cuts and Jobs Act was scheduled to sunset at the end of 2025, potentially cutting the exemption from $13.99 million per person to approximately $7 million. Attorneys across the country were rushing clients into irrevocable trusts to lock in the higher exemption before it disappeared.

Then the landscape shifted entirely. The One Big Beautiful Bill Act permanently increased the estate and gift tax exemption to $15 million per person, effective January 1, 2026, with annual inflation adjustments beginning in 2027. The generation-skipping transfer tax exemption also increased to $15 million.

What does this mean in plain language? Unless your individual estate exceeds $15 million — or your combined estate as a married couple exceeds $30 million — you will owe zero federal estate taxes. No irrevocable trust needed for tax purposes. No complicated gifting strategies required.

If your estate does not exceed $15 million and you’re a married couple with a plan involving two revocable trusts, you may want to consider whether simplifying to a single trust makes more sense.

However, don’t forget state-level estate taxes. States such as Massachusetts and Oregon impose estate taxes with thresholds as low as $1 million, meaning your estate may avoid federal tax entirely but still face a significant state tax bill. New York’s estate tax exclusion will increase to $7,350,000 on January 1, 2026, but estates valued at more than 105% of that exclusion face tax on the full estate value with no exclusion applied at all.

💡 Critical tip: If you already created irrevocable trusts to use your entire exemption during your lifetime, you may wish to add the increased amounts to those trusts. Conversely, if you were pressured into an irrevocable trust solely for estate tax avoidance and your estate falls well under $15 million, consult an attorney about whether the trade-offs — lost control, lost step-up in basis, complexity — still make sense. The law changed. Your plan should too.

🏠 6. The Probate Trap: Both Trusts Avoid It, but Only If You Fund Them Properly — and Most People Don’t

Here’s a dirty secret of the estate planning industry: roughly 40% of people who create trusts later discover their documents are incomplete or legally flawed, often because they never properly transferred assets into the trust. A trust that exists on paper but doesn’t hold your assets is about as useful as a garage with no car in it.

“Funding” a trust means changing the legal title of your assets — your house, bank accounts, investment accounts, business interests — from your personal name to the name of the trust. If your home is still titled in “John and Jane Smith” instead of “The Smith Family Trust,” that home goes through probate regardless of what your trust document says.

Wills don’t avoid probate — they just provide instructions for how courts should distribute your assets. Only strategies like revocable trusts, beneficiary designations, and proper joint ownership arrangements eliminate probate entirely.

Both revocable and irrevocable trusts avoid probate equally well — when properly funded. The difference is what you’re avoiding and what you’re gaining beyond probate avoidance.

💡 Critical tip: The day you sign your trust documents is not the finish line — it’s the starting line. Trust funding — transferring your assets into the trust — might involve changing titles and property deeds, which can add $500 to $1,500 to your total cost. Ask your attorney specifically whether funding is included in their fee. If they say “we’ll give you instructions to do it yourself,” understand that unfunded trusts fail constantly. Pay for the help. It’s the difference between a plan that works and expensive paperwork sitting in a drawer.

🧮 7. The Trust Tax Brackets Are Punishing — and Most People Don’t Realize Their Irrevocable Trust Is Getting Crushed

Here’s a tax reality that shocks most people the first time they hear it: trusts hit the highest federal income tax bracket at absurdly low income levels compared to individuals.

For 2026, trust income is taxed at four escalating rates, and the highest bracket kicks in at income levels far below what triggers the top rate for individual filers. An individual doesn’t reach the 37% bracket until income exceeds roughly $640,000. A trust can reach the highest marginal rate on income above approximately $15,450.

This matters enormously for irrevocable trusts that retain income rather than distributing it to beneficiaries. Because trusts reach higher income tax brackets quickly, some grantors design distribution rules that shift taxable income to beneficiaries who may be in lower brackets.

Revocable trusts dodge this bullet entirely. Distributions from a revocable trust are usually not taxable to the beneficiary since the grantor pays the tax — and since the trust is a disregarded entity, income is taxed at the grantor’s personal rate, which has much more room before hitting the top bracket.

The One Big Beautiful Bill Act also changed provisions affecting irrevocable non-grantor trusts — specifically, beginning in 2026, non-grantor trusts and estates entirely payable to charities may now face income taxes to a certain extent, a provision that requires further Congressional clarification.

💡 Critical tip: If you have an irrevocable trust generating income from investments, real estate, or business interests, and that income stays inside the trust, you’re being taxed at the maximum rate on everything above approximately $15,450. Designing the trust to distribute income to beneficiaries — who likely have much higher bracket thresholds — can save thousands annually. This is exactly the kind of strategic distribution planning that justifies hiring an experienced trust attorney and CPA working together.

🎯 8. The Bottom Line: A Decision Framework That Actually Tells You Which Trust You Need

After everything we’ve covered — the new $15 million exemption, the IRS basis step-up ruling, the Medicaid five-year lookback, the compressed trust tax brackets, and the probate cost reality — here’s the decision framework nobody else gives you.

Choose a revocable trust if: your estate is under $15 million (single) or $30 million (married), you want to avoid probate and maintain privacy, you want seamless incapacity management, you don’t need protection from creditors or Medicaid, and you want maximum flexibility to change your plan as life evolves.

Choose an irrevocable trust if: you need to protect assets from lawsuits, creditors, or divorce judgments, you’re planning for Medicaid eligibility at least five years out, your estate exceeds the federal exemption or you live in a state with a low exemption threshold, you want to remove asset appreciation from your taxable estate, or you have a specific purpose like funding life insurance outside your estate.

Use both if: you have a complex estate that benefits from flexibility on some assets and protection on others.

💡 Final critical tip: The biggest mistake in estate planning isn’t choosing the wrong trust — it’s doing nothing at all. 56% of Americans underestimate probate costs, thinking the process costs under $1,000. The second biggest mistake is creating a trust in isolation without coordinating it with your beneficiary designations, property titles, retirement accounts, and insurance policies. A trust is one piece of a system. If the pieces don’t work together, the system fails — and your family pays the price in dollars, delay, and heartache. Get the plan reviewed by a qualified estate planning attorney who understands the 2026 exemption changes, the IRS basis rules, and your state’s specific estate and Medicaid laws. Then fund the trust properly, and revisit it every three to five years. That’s how you actually protect your assets — not with a document in a drawer, but with a living plan that evolves as your life does.