An irrevocable trust can shield assets from estate tax, protect an inheritance from a beneficiary’s creditors, and help a family plan for long-term care. It does all of that by taking something away from you: ownership and control. Before signing one, it’s worth knowing exactly what you’re getting in exchange, and what you can still do if circumstances change.
In Texas, “Irrevocable” Has to Be Written Down
Texas is unusual. Under the Texas Trust Code, a trust is revocable unless the document expressly says it is irrevocable. A trust that was meant to protect assets but leaves that language out may be treated as revocable, and a revocable trust protects nothing from your creditors or your taxable estate. The wording matters from the first draft.
What an Irrevocable Trust Can Protect
When properly drafted and funded, an irrevocable trust can:
- Remove assets from your taxable estate. Property you give to the trust, and its future growth, generally won’t be counted at your death. The federal exemption rises to $15.48 million per person in 2027, so this matters most for larger estates, family businesses, and land that is likely to appreciate.
- Protect beneficiaries from their own creditors. A spendthrift clause can keep a child’s inheritance out of reach of the child’s creditors, lawsuits, and in many cases a divorcing spouse, while the assets stay in the trust.
- Support long-term care planning. A Medicaid asset protection trust, funded early enough, can help preserve assets if nursing home care is needed later.
- Provide for a beneficiary who needs structure, such as a minor, someone with special needs, or someone who struggles with money.
What It Doesn’t Protect
Irrevocable trusts have limits that are often misunderstood:
- You can’t protect assets from yourself. Texas doesn’t allow self-settled asset protection trusts. If you create a trust and remain a beneficiary, your creditors can generally reach what the trustee could distribute to you.
- Existing creditors can still reach the assets. Transfers made to avoid a known debt or lawsuit can be undone as fraudulent transfers.
- Medicaid looks back five years. Assets transferred within the look-back period can delay eligibility. A trust created after care is already needed usually comes too late.
- Income taxes don’t disappear. Many irrevocable trusts are “grantor trusts,” meaning you keep paying the income tax on trust earnings.
- Heirs may lose the step-up in basis. Assets removed from your estate generally keep your original tax basis, which can mean larger capital gains for your heirs when they sell.
- An unfunded trust protects nothing. The trust only covers assets actually retitled into it. Our article on the biggest mistakes people make when funding an irrevocable trust covers how plans fail at this step.
Can You Change an Irrevocable Trust in Texas?
“Irrevocable” doesn’t always mean permanent. Texas law offers several ways to adjust a trust when laws, family circumstances, or tax rules change:
- Decanting. A trustee with discretion over distributions may be able to move the assets into a new trust with updated terms, without going to court.
- Court modification. A court can modify or terminate a trust when circumstances the settlor didn’t anticipate have arisen, when the change would further the trust’s purposes, or, in some cases, when all of the beneficiaries agree.
- Trust protectors and advisors. Many modern trusts name a protector with power to update administrative terms, change trustees, or respond to new tax laws.
- Combining or dividing trusts. A trustee can sometimes merge similar trusts or split one into several to simplify administration.
Each option has limits. Changes can’t defeat a material purpose of the trust, and some create gift or income tax consequences. The flexibility you’ll have later depends largely on what is written into the document today.
Build the Trust Around Your Goals, Not the Other Way Around
The right irrevocable trust depends on what you’re trying to protect and from whom: estate tax, a beneficiary’s creditors, nursing home costs, or a child who isn’t ready to manage money. A trust drafted for one goal can work against another.
Carroll Law Group PLLC helps families in New Braunfels and the surrounding Texas Hill Country decide whether an irrevocable trust fits their plan, then draft and fund it correctly. Schedule a free initial consultation to talk through your options today.