Question 1

Can an irrevocable trust ever be modified?

Accepted Answer

While the general rule is that irrevocable trusts cannot be changed, there are several exceptions. Many states allow modification through a process called decanting, where the trustee transfers assets from one irrevocable trust to a new one with different terms. Courts can also modify irrevocable trusts under the doctrine of equitable deviation if circumstances have changed significantly since the trust was created. Additionally, if all beneficiaries and the grantor (if living) consent, some states allow modification under the Uniform Trust Code. The specific options available depend heavily on state law.

Question 2

Does a revocable trust protect assets from nursing home costs?

Accepted Answer

No. A revocable trust does not protect assets from nursing home costs or Medicaid spend-down requirements. Because the grantor retains control over the assets, Medicaid treats them as available resources. An irrevocable trust can potentially protect assets from Medicaid, but only if the transfer was made more than 5 years before applying for Medicaid (the "look-back period"). Transfers made within the look-back period will result in a penalty period of Medicaid ineligibility. Medicaid planning with irrevocable trusts requires careful timing and legal guidance.

Question 3

What is the step-up in basis and how does it apply to trusts?

Accepted Answer

The step-up in basis is a tax provision that adjusts the cost basis of an asset to its fair market value at the owner's date of death. Assets in a revocable trust receive a full step-up in basis upon the grantor's death because they are included in the taxable estate. Assets in an irrevocable trust may or may not receive a step-up, depending on the trust structure. If the trust is a grantor trust for income tax purposes, the assets generally receive a step-up. This is an important consideration when deciding which assets to place in an irrevocable trust.

Question 4

How are revocable and irrevocable trusts taxed differently?

Accepted Answer

A revocable trust is a "grantor trust" for tax purposes, meaning all income is reported on the grantor's personal tax return using their Social Security number. An irrevocable trust that is not a grantor trust is a separate tax entity that files its own return (Form 1041) and pays taxes at compressed trust tax rates, which reach the highest marginal rate at just $14,450 of income (2024). This makes distributing income to beneficiaries a common tax strategy, as beneficiaries typically have lower individual tax rates.

Question 5

What happens to a revocable trust when the grantor dies?

Accepted Answer

Upon the grantor's death, a revocable trust becomes irrevocable by operation of law. The successor trustee named in the trust document takes over management and is responsible for settling the trust, which includes paying debts and taxes, filing any required tax returns, and distributing assets to beneficiaries according to the trust terms. Unlike probate, this process does not require court supervision or approval, which is why it is typically faster and less expensive than administering a will through probate.

Feature	Revocable Trust	Irrevocable Trust
Ability to Modify	Can be amended, restated, or revoked at any time by the grantor	Generally cannot be changed once created, with limited exceptions
Control Over Assets	Grantor retains full control and can serve as trustee	Grantor relinquishes ownership and control of assets placed in the trust
Estate Tax Benefits	No estate tax benefits; assets are included in the grantor's taxable estate	Assets are removed from the grantor's taxable estate, potentially reducing estate taxes
Creditor Protection	No creditor protection; assets are treated as the grantor's property	Generally protects assets from the grantor's creditors once transferred
Income Tax Treatment	Grantor reports all trust income on their personal tax return (grantor trust)	Trust may file its own tax return and pay taxes at trust tax rates, or may be a grantor trust depending on structure
Medicaid Planning	Assets count as available resources for Medicaid eligibility purposes	Assets may be excluded from Medicaid calculations after the 5-year look-back period
Probate Avoidance	Avoids probate for assets titled in the trust	Avoids probate for assets titled in the trust
Complexity and Cost	Simpler to create and maintain; moderate attorney fees	More complex to establish; higher attorney fees and potential ongoing administration costs

Revocable Trust vs Irrevocable Trust: Key Differences Explained (2026)

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