An irrevocable trust protects only what you actually put into it. Sign the trust agreement, but leave the deed and accounts in your own name, and the trust sits empty while those assets are exposed to estate taxes, creditors, and probate. Funding is where poorly drafted plans most often fail.
Mistake #1: Signing the Trust but Never Retitling the Assets
Ownership must be transferred on paper. A trust agreement does not automatically transfer anything, and banks and county records only recognize the name on the title. To properly transfer ownership, you will need:
- For real estate: a new deed in the name of the trustee, which must be signed, notarized, and recorded with the county.
- For bank and brokerage accounts: accounts can be transferred to the trustee’s name or opened under the trust’s taxpayer identification number.
- For business interests, a written assignment is needed, often with the consent of the other owners.
- Life insurance policies (see Mistake #3).
Anything left out generally falls under your will or intestacy law. That often means probate, the process the trust was supposed to avoid.
Mistake #2: Keeping Too Much Control After the Transfer
Under Section 2036 of the Internal Revenue Code, property transferred is pulled back into your taxable estate if you retain the right to possess, enjoy, or receive income from it for life.
A common example is when the family home is deeded to a trust, but the family continues to live there rent-free without any written agreement. The IRS may argue that there was an implied agreement for the family to continue using the home. Paying personal bills from a trust account creates a similar problem. The trustee must act like a true trustee.
Mistake #3: Moving the Wrong Assets
Not every asset belongs in an irrevocable trust.
- Retirement accounts: An IRA cannot simply be transferred to a trust. Instead, the transfer is usually treated as a full withdrawal and taxed at once. Designating beneficiaries may be a better option.
- Life insurance policies: If you transfer a life insurance policy and die within three years, the proceeds may be returned to your estate under Section 2035. Buying a new policy through the trust can avoid this.
- Highly appreciated assets: Due to changes in the 2026 tax laws, it’s important to consider how these assets will be treated.
The 2026 Tax Picture Changes the Funding Calculation
Public Law 119-21, signed on July 4, 2025, raises the federal basic exclusion amount starting in 2026. Unlike previous law, there is no scheduled sunset date, and the amount will be adjusted for inflation moving forward.
For many families, this makes capital gains the biggest concern. In Revenue Ruling 2023-2, the IRS concluded that assets in an irrevocable grantor trust that remain outside your taxable estate receive no step-up on basis upon death. Your beneficiaries inherit your original basis.
Moving low-basis stocks or real estate into a trust can reduce the estate tax that your family would have owed, and capital gains taxes they would not have paid. If your estate is comfortably under the exemption, it deserves a fresh look at asset selection.
Mistake #4: Skipping the Gift Tax Paperwork
Funding an irrevocable trust often involves completing a gift tax return, even if no tax is actually due. Some common mistakes include:
- Forgetting to provide Crummey notices to the beneficiaries, which are necessary for contributions to qualify for the annual gift tax exclusion.
- Skipping a qualified appraisal for real estate or closely held business interests, which can lead to audits.
- Overlooking how the generation-skipping transfer tax exemption is applied to a trust intended for grandchildren.
A return that adequately discloses a gift starts the IRS’s limitation period. One that does not leave a gift open to challenge for years.
Mistake #5: Ignoring Medicaid Timing and Property Side Effects
Federal Medicaid law imposes a five-year look-back period on transfers of less than fair market value, including transfers to trusts. If funds are transferred to a trust too late, a penalty period may begin when long-term care is required.
Real estate transfers can also affect property tax exemptions, homeowner’s insurance, and mortgage terms. Check each one before the deed is recorded.
Get the Funding Right the First Time
An irrevocable trust is only as strong as the steps taken to fund it. Carroll Law Group, PLLC, reviews what you own, how each asset is titled, and which assets belong in the trust, so your plan does what it was designed to do. Schedule your free initial consultation today and take the next step toward preserving your legacy and your family’s future.