Revocable vs irrevocable trust—which is right for your California estate plan? The choice has major implications for control, taxes, and asset protection. This guide explains the key differences and helps you determine which type of trust fits your needs. Spoiler: Most Californians need a revocable living trust.
What is a Revocable Living Trust?
A revocable living trust is the most common type of trust for California families. "Revocable" means you can change, amend, or completely cancel the trust at any time during your lifetime. You maintain full control.
Key Features of Revocable Trusts:
- Full control — You're the trustee; you manage everything
- Can be changed anytime — Add assets, remove beneficiaries, modify terms
- Can be cancelled — Dissolve the trust and take assets back
- Avoids probate — Assets transfer privately outside court
- Incapacity protection — Successor trustee can manage assets if you're incapacitated
- You're still the owner — For tax purposes, you own everything in the trust
What is an Irrevocable Trust?
An irrevocable trust cannot be changed or cancelled without the consent of beneficiaries (and sometimes court approval). Once you transfer assets to an irrevocable trust, you've given them away—they're no longer "yours."
Key Features of Irrevocable Trusts:
- Cannot be changed — Terms are permanent (with rare exceptions)
- Assets belong to the trust — Not you; you've given them away
- Creditor protection — Assets protected from your creditors
- Estate tax benefits — Assets not included in your taxable estate
- Medicaid eligibility — Can help qualify for Medi-Cal (with 30-month lookback)
- Separate tax entity — Trust files its own tax return
Revocable vs Irrevocable Trust: Key Differences
| Feature | Revocable Trust | Irrevocable Trust |
|---|---|---|
| Can you change it? | ✓ Yes, anytime | ✗ No (or very difficult) |
| Who owns assets? | You (grantor) | Trust owns them |
| Avoids probate? | ✓ Yes | ✓ Yes |
| Creditor protection? | ✗ No | ✓ Yes |
| Estate tax benefits? | ✗ No | ✓ Yes |
| Medi-Cal planning? | ✗ No | ✓ Yes (with planning) |
| Control | Full control | Give up control |
| Tax filing | Your personal return | Separate trust return |
Tax Implications of Each Trust Type
Understanding the tax differences between revocable and irrevocable trusts is crucial for making an informed decision. The tax treatment differs significantly during your lifetime and after death.
Revocable Trust Tax Treatment:
A revocable living trust is considered a "grantor trust" for tax purposes. This means the IRS ignores the trust—you're treated as if you still own the assets directly.
- Income tax: All trust income reported on YOUR personal tax return (Form 1040)
- Capital gains: Same treatment as owning assets personally
- Estate tax: All trust assets included in your taxable estate at death
- No separate tax ID needed: Uses your Social Security number during your lifetime
- No separate tax return: No Form 1041 required while you're alive
- Step-up in basis: Beneficiaries receive stepped-up basis at your death
Irrevocable Trust Tax Treatment:
An irrevocable trust is a separate legal entity with its own tax obligations. Because you've given up control, the assets are no longer "yours" for tax purposes.
- Separate tax entity: Trust files its own return (Form 1041) annually
- Compressed tax brackets: Trust income hits the highest 37% bracket at just $14,450 (2024)
- Estate tax: Assets NOT in your taxable estate (potential significant savings)
- Requires separate tax ID (EIN): Must apply for Employer Identification Number
- Gift tax implications: Transfers to irrevocable trust may trigger gift tax
- Loss of step-up: Some irrevocable trusts lose the step-up in basis benefit
Medi-Cal Planning and Irrevocable Trusts
One of the most common reasons Californians consider irrevocable trusts is Medi-Cal planning—protecting assets while qualifying for government-funded long-term care.
How Medi-Cal Asset Protection Works:
Medi-Cal (California's Medicaid program) has strict asset limits for eligibility. As of 2024, a single individual can only have about $2,000 in countable assets to qualify. However, assets transferred to an irrevocable trust may not count toward this limit—with important caveats.
The 30-Month Look-Back Period:
- California's look-back: Medi-Cal examines asset transfers made within 30 months of application
- Penalty period: Transfers during this window create a penalty period of ineligibility
- Planning ahead: Irrevocable trust transfers must occur at least 30 months before you need care
- Home exemption: Your primary residence may be exempt regardless of trust status
Can You Convert a Revocable Trust to Irrevocable?
Yes, a revocable trust can become irrevocable, but the circumstances matter:
Automatic Conversion at Death:
Every revocable trust automatically becomes irrevocable when the grantor (creator) dies. At that point, the terms are locked and beneficiaries cannot change them. This is normal and expected.
Voluntary Conversion During Life:
You can intentionally convert a revocable trust to irrevocable by:
- Amending the trust to remove your power to revoke
- Creating a new irrevocable trust and transferring assets
- Using a "trust decanting" strategy in certain cases
Which Trust Type for Prop 19 Benefits?
California's Proposition 19 (effective February 2021) significantly changed property tax rules for inherited properties. Understanding how trust type affects Prop 19 is crucial for California families.
Prop 19 and Revocable Trusts:
A revocable living trust preserves Prop 19 parent-child exclusion benefits when properly structured. The property passes to children at the parent's assessed value (with limitations) rather than being reassessed at current market value.
Prop 19 and Irrevocable Trusts:
Transfers to irrevocable trusts during life may trigger immediate reassessment because you're giving up ownership. The parent-child exclusion under Prop 19 requires the transfer to occur at death, not during life.
Key Prop 19 Limitations (Both Trust Types):
- Primary residence only: Parent-child exclusion now limited to primary residence
- Child must move in: Child must make inherited home their primary residence within one year
- $1 million cap: Only first $1 million above assessed value is excluded from reassessment
- Grandchildren limited: Only qualifies if parent (middle generation) is deceased
When to Choose a Revocable Trust
Most Californians should choose a revocable living trust. Here's why:
- Want to avoid probate (the #1 reason for trusts)
- Want flexibility to make changes
- Want to maintain full control of your assets
- Have an estate under $13 million (no estate tax benefit from irrevocable)
- Don't need creditor protection
- Want incapacity planning
When to Choose an Irrevocable Trust
Irrevocable trusts are specialized tools for specific situations:
Good Candidates:
- Medicaid/Medi-Cal planning
- Estates over $13 million
- Asset protection needs
- Special needs beneficiaries
- Life insurance trusts (ILITs)
- Charitable planning
NOT Needed If:
- Estate under $13 million
- Just want to avoid probate
- Want flexibility and control
- Don't need creditor protection
- No Medi-Cal planning needs
Can You Have Both?
Yes, many estate plans include both types of trusts:
- Revocable trust for your home, bank accounts, and general assets (probate avoidance)
- Irrevocable life insurance trust (ILIT) to remove life insurance from taxable estate
- Special needs trust for disabled beneficiaries
- Irrevocable Medicaid trust for long-term care planning
Revocable vs Irrevocable Trust Cost in California
| Cost Factor | Revocable Trust | Irrevocable Trust |
|---|---|---|
| Our Service | $400 individual / $500 couples | Not offered (requires custom drafting) |
| Traditional Attorney | $1,500-$3,000 | $2,000-$10,000+ |
| Complexity | Straightforward | Complex, customized |
| Ongoing Costs | None | Annual trust tax returns |
Frequently Asked Questions
Q: What is the main difference between revocable and irrevocable trusts?
A: A revocable trust can be changed or cancelled anytime during your lifetime—you maintain full control. An irrevocable trust cannot be changed without beneficiary consent—you give up control but may gain creditor protection and potential estate tax benefits.
Q: Which type of trust do most Californians need?
A: Revocable living trust. It avoids probate, maintains flexibility, and you keep full control of your assets. Irrevocable trusts are specialized tools only needed for Medi-Cal planning, estates over $13 million, or specific asset protection scenarios.
Q: Does a revocable trust protect assets from creditors?
A: No. Because you maintain control of a revocable trust, creditors can still reach those assets during your lifetime. Only irrevocable trusts provide creditor protection because you've given up ownership.
Q: Can I change a revocable trust to irrevocable?
A: A revocable trust automatically becomes irrevocable when you die. You can voluntarily convert during life by amending the trust, but this requires careful legal and tax planning. It's a permanent decision that shouldn't be made without professional guidance.
Q: Do I need an irrevocable trust for estate tax planning?
A: Only if your estate exceeds $13.61 million (2024 federal exemption). California has no state estate tax. Most Californians don't need irrevocable trusts for tax purposes—the complexity isn't worth it unless you're in this high-net-worth category.
Q: How does an irrevocable trust help with Medi-Cal?
A: Assets transferred to an irrevocable trust may not count toward Medi-Cal's asset limits for long-term care eligibility. However, California has a 30-month look-back period—transfers must occur at least 30 months before you apply. This requires careful advance planning with an elder law attorney.
Q: Which trust type is better for Prop 19 property tax benefits?
A: A revocable living trust preserves Prop 19 parent-child exclusion benefits. Transfers to irrevocable trusts during life may trigger immediate property tax reassessment. For most California families, a revocable trust is the better choice for property tax planning.
Q: How much does each type of trust cost?
A: Revocable living trusts cost $400-$500 through our service (or $1,500-$3,000 with traditional attorneys). Irrevocable trusts require custom legal drafting and typically cost $2,000-$10,000+ depending on complexity. We only offer revocable trusts because that's what most Californians need.
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