Irrevocable Trust

You transfer assets to a trustee, usually someone other than yourself, and give up the right to take them back. From then on the trust document and the trustee decide how the money is invested and who receives it. Done right, the assets and all their future growth are no longer part of your estate.

That result holds only if you let go completely. The assets come back into your taxable estate if you keep the income from them, the right to use them, or the power to revoke or amend the trust. Giving an existing life insurance policy to a trust and dying within three years also pulls the proceeds back in, which is why an irrevocable life insurance trust often buys the policy itself.

Funding the trust is a gift. The annual gift tax exclusion, $19,000 per recipient in 2026, covers only gifts of a present interest, and gifts to a trust are usually future interests unless each beneficiary gets a short window to withdraw the gift, often called a Crummey power after a 1968 court case. Larger gifts use part of the lifetime exemption, $15,000,000 per person in 2026 and shared with the estate tax, and must be reported on Form 709.

An irrevocable trust can be taxed in either of two ways, and the drafting decides which.

A non-grantor trust is its own taxpayer. Income it keeps is taxed at compressed trust tax rates that reach 37% above $16,000 of taxable income in 2026, while income it pays out is generally taxed to the beneficiaries, as the trust fund page explains.

An intentionally defective grantor trust is outside your estate for estate tax but still yours for income tax, because the document gives you a power, such as the right to swap in assets of equal value, that triggers the grantor trust rules. You pay the tax on the trust’s income from your own pocket, and the IRS has ruled that doing so is not an extra gift to the beneficiaries. Each tax payment shrinks your estate while the trust grows untaxed.

Basis is the other half of the math. Assets you give away keep your cost basis, and in Rev. Rul. 2023-2 the IRS held that assets in an irrevocable grantor trust that are not included in your estate get no basis adjustment when you die. Heirs inherit the built-in gain instead of a fresh step-up in basis.

Most irrevocable trusts are built for one job, and the table below lists the common ones. A few rules stand out for 2026.

The generation-skipping transfer tax exemption is $15,000,000 per person, which sets how much can go into a dynasty trust for grandchildren and later generations free of that tax. A charitable remainder trust must pay out 5%–50% of its value a year for life or a term of up to 20 years, the charity’s remainder must be worth at least 10% at the start, and the trust itself generally pays no income tax, though unrelated business income draws a 100% excise tax. IRA owners 70½ or older can make a one-time qualified charitable distribution of up to $55,000 to one in 2026.

Special needs trusts come in two forms. A third-party trust, funded by family, can hold any amount for a person with a disability and leave what remains to others; an ABLE account often works alongside it. A first-party trust holding the person’s own money, for someone under 65, must repay the state’s Medicaid costs at death.

Irrevocable means you, the grantor, can’t simply take the assets back or rewrite the terms on your own. It doesn’t always mean frozen for decades. Modern trusts are often drafted with flexibility in mind, and state law adds tools of its own. Whatever the route, a change must respect the trust’s purpose and its tax design: a power that lets you reclaim the assets or their income can pull them back into your taxable estate. Common routes include:

With a federal exemption of $15,000,000 per person in 2026, indexed for inflation from 2027 with no scheduled sunset, and $30,000,000 for a married couple using portability, few families need an irrevocable trust to avoid federal estate tax. For them, giving assets away can backfire, because heirs lose the step-up that would have erased the gain, as the example shows.

The trade-off can still pay for an estate likely to exceed the exemption, a state estate tax with a lower threshold such as Washington’s $3,000,000 exclusion, life insurance that would push an estate over a limit, a beneficiary who needs protection from creditors or their own spending, a disabled beneficiary, charitable goals, or long-range Medicaid planning. Because the decision is hard to reverse, it belongs inside a full estate plan reviewed by an attorney.