An irrevocable trust is used when the goal requires actually giving something up. A revocable living trust avoids probate and manages incapacity while you keep complete control — and because you keep control, it protects nothing and saves no tax. An irrevocable trust asks you to relinquish control over the property you transfer into it, and in exchange it can remove assets from your taxable estate, place them beyond the reach of future creditors, or position them so they are not counted against Medi-Cal eligibility.
That trade is the whole subject. Californians considering an irrevocable trust should understand what they are giving up, what California specifically does and does not permit, and the income tax cost that often accompanies the estate tax benefit. The Holmes Law drafts and administers California irrevocable trusts and advises on whether one is warranted in the first place.
What Makes a Trust Irrevocable
A trust is irrevocable when the settlor has not reserved the power to revoke it. Under California Probate Code section 15400, a trust is presumed revocable unless the instrument expressly says otherwise — so an irrevocable California trust must declare itself irrevocable.
A revocable trust also becomes irrevocable automatically at the settlor’s death. Most irrevocable trusts in existence are of that kind: an ordinary living trust whose settlor has died, or a subtrust — a bypass trust, a QTIP trust, a child’s lifetime share — that came into being under the terms of a living trust.
The irrevocable trusts people deliberately create during life are a different category, and each is built for a specific job.
The Main Types of California Irrevocable Trusts
Irrevocable Life Insurance Trust (ILIT)
The trust owns the life insurance policy, so the death benefit is not included in the insured’s taxable estate. The insured makes annual gifts to the trust to cover premiums, and the trust gives beneficiaries a temporary right to withdraw those gifts — a Crummey power — so the contributions qualify for the annual gift tax exclusion. Notices have to be sent each year; ILITs that fail do so because the administrative routine was abandoned. An existing policy transferred into an ILIT is subject to a three-year lookback under Internal Revenue Code section 2035, so a new policy purchased by the trust is cleaner.
Medi-Cal Asset Protection Trust
An irrevocable trust designed so that its assets are not countable for long-term care Medi-Cal, typically retaining an income interest for the settlor while giving up access to principal. The transfer is subject to a lookback period, so this is planning that must be done years in advance — not after a hospital discharge planner raises the subject. California’s Medi-Cal transfer and recovery rules have changed materially in recent years, so any plan built on older advice should be re-examined against current rules before it is relied on.
Spousal Lifetime Access Trust (SLAT)
One spouse creates an irrevocable trust for the other, using federal gift tax exemption to move assets and their future appreciation out of the taxable estate while the beneficiary spouse retains indirect access to distributions. Attractive when the federal exemption is high and expected to fall. The obvious risks are divorce and the death of the beneficiary spouse, both of which end the indirect access. Where both spouses create SLATs for each other, the trusts must be meaningfully different to avoid the reciprocal trust doctrine.
Qualified Personal Residence Trust (QPRT)
You transfer a residence into a trust while retaining the right to live in it rent-free for a term of years. The gift is valued at a discount because the beneficiaries receive the home only after the term. If you outlive the term, the residence and all its appreciation are out of your estate — and you must then pay fair market rent to continue living there. If you die during the term, the property comes back into your estate and the exercise was neutral. For Californians holding a long-appreciated residence, the estate tax benefit has to be weighed against the loss of the basis step-up.
Grantor Retained Annuity Trust (GRAT)
You transfer assets and receive a fixed annuity back for a term. Anything the assets earn above the IRS assumed rate passes to the remainder beneficiaries with little or no gift tax cost. GRATs work best with assets expected to appreciate sharply — pre-IPO stock, a business about to be sold — and they are essentially a bet that costs little if it fails.
Intentionally Defective Grantor Trust (IDGT)
Structured so the assets are outside the settlor’s estate for estate tax purposes but the settlor remains the owner for income tax purposes. The settlor pays the trust’s income tax, which is itself a further tax-free transfer to the beneficiaries, and can sell assets to the trust without triggering gain. A sophisticated tool for substantial estates.
Third-Party Special Needs Trust
Holds an inheritance for a beneficiary with a disability so it supplements rather than replaces SSI and Medi-Cal. Funded by a parent or relative rather than the beneficiary, it carries no Medi-Cal payback requirement.
Charitable Remainder and Charitable Lead Trusts
A charitable remainder trust pays an income stream to individuals for a term or for life with the remainder to charity; a charitable lead trust reverses that. A CRT can sell a highly appreciated asset without immediate capital gain to the trust, which is a significant advantage in California, where a long-held property or a concentrated stock position often carries enormous embedded gain and California taxes capital gain as ordinary income.
Long-Term and Multigenerational Trusts
Californians read about perpetual “dynasty” trusts in states like Nevada and South Dakota. California does not permit them. California follows the Uniform Statutory Rule Against Perpetuities, codified at Probate Code section 21205 and following, which validates a nonvested interest that either satisfies the common-law rule or in fact vests or terminates within 90 years. A California trust can last a long time; it cannot last forever.
What California Does Not Allow: Self-Settled Asset Protection Trusts
This is the most important limitation for Californians researching irrevocable trusts online. Nevada, Delaware, Alaska, South Dakota and others permit a domestic asset protection trust — an irrevocable trust the settlor creates for the settlor’s own benefit that is nevertheless shielded from the settlor’s creditors.
California does not. Under California law, where a settlor is a beneficiary of a trust, a spendthrift clause is invalid as to the settlor’s own interest, and the settlor’s creditors may reach the maximum amount the trustee could pay to or apply for the settlor’s benefit. A California resident who forms a Nevada trust holding California real property, for California creditors, should understand that California courts are not obliged to apply Nevada law, and that fraudulent transfer principles apply to transfers made with existing or foreseeable claims. Asset protection in California is real, but it is achieved by giving assets away to trusts for other people, by exemption planning, by entity structuring, and by insurance — not by keeping the benefit and relabeling the ownership.
The Basis Tradeoff Nobody Mentions
Assets included in your estate at death receive a new income tax basis equal to fair market value, eliminating built-in capital gain. Assets you gave away during life — including to an irrevocable trust in a completed gift — generally keep your original basis.
This matters enormously in California. A residence bought for $180,000 that is now worth $1,400,000 carries more than a million dollars of embedded gain. Left in the estate, that gain disappears at death. Given to an irrevocable trust, it follows the property to the beneficiaries, who face both federal capital gains tax and California income tax at ordinary rates when they sell.
Because California has no state estate tax, and the federal exemption reaches only a small fraction of estates, many Californians who transfer appreciated property into an irrevocable trust are trading away a certain and valuable income tax benefit to avoid an estate tax they would never have paid. For a married California couple with a highly appreciated home, community property with right of survivorship under Civil Code section 682.1 — which preserves the double step-up under Internal Revenue Code section 1014(b)(6) — is frequently worth far more than any irrevocable trust. Run the numbers before signing.
How Irrevocable Trusts Are Taxed
The threshold question is whether the trust is a grantor trust. If it is, the settlor reports all of the trust’s income on their personal return. If it is not, the trust is a separate taxpayer with its own return, and its compressed rate brackets reach the top federal rate at a very low level of income — which is why non-grantor trusts usually distribute income rather than accumulate it.
California adds a distinctive layer. Under Revenue and Taxation Code section 17742, California taxes trust income based on the residence of the fiduciary and the residence of noncontingent beneficiaries, apportioning where those are split between California and elsewhere, and applies a throwback rule that can tax accumulated income when it is later distributed to a California beneficiary. The practical consequence is that who serves as trustee has state tax consequences, and a trust’s California tax profile can change when a trustee or a beneficiary moves. This should be considered when the trust is drafted rather than discovered on a later return.
Changing an Irrevocable California Trust
“Irrevocable” is less final than it sounds. California provides several routes when a trust no longer fits:
- Settlor and beneficiary consent. Under Probate Code section 15404, if the settlor and all beneficiaries consent, the trust may be modified or terminated.
- Beneficiary petition. Under section 15403, all beneficiaries may petition — but a court will not modify or terminate if continuance is necessary to carry out a material purpose, unless the reason for the change outweighs it.
- Changed circumstances. Section 15409 permits a court to modify administrative or dispositive terms, or terminate, where circumstances unknown and unanticipated by the settlor would defeat or substantially impair the trust’s purposes.
- Decanting. Under the California Uniform Trust Decanting Act, Probate Code section 19501 and following, a trustee with discretionary distribution authority may distribute property into a new trust with updated terms, often without a court proceeding. How much may change depends on how broad the trustee’s discretion is.
- Reformation to correct a drafting mistake or to conform the instrument to the settlor’s tax intent.
These are valuable for trusts written decades ago under different tax law. They are also technical, and a modification made without regard to the gift, estate, generation-skipping, and income tax consequences can create a problem larger than the one it solves.
Trustee Duties in an Irrevocable Trust
The settlor should not serve as trustee of an irrevocable trust intended to remove assets from the estate — retaining control undermines the entire purpose. That means selecting someone else, and that person takes on the fiduciary duties set out beginning at Probate Code section 16000: loyalty, impartiality among beneficiaries, prudent investment, keeping property properly earmarked, keeping beneficiaries reasonably informed, and accounting under section 16062.
Where a trust is created during the settlor’s lifetime and becomes irrevocable, or where a revocable trust becomes irrevocable at death, the trustee must also serve the notification required by Probate Code section 16061.7 — which starts the 120-day window for a contest. Missing that step leaves the trust exposed indefinitely.
Frequently Asked Questions
Can I be the trustee of my own irrevocable trust?
Sometimes, in limited roles, but generally not where the objective is to remove assets from your taxable estate or shield them from creditors. Retained control is what defeats those purposes.
Will an irrevocable trust protect my home from Medi-Cal?
It can, if it is properly structured and funded well before care is needed, because a lookback period applies to transfers. A revocable trust offers no protection at all. Current Medi-Cal rules should be confirmed before relying on any plan.
Can a California trust last forever?
No. California follows the Uniform Statutory Rule Against Perpetuities under Probate Code section 21205 and following, with a 90-year backstop. Perpetual dynasty trusts are a feature of other states.
Should I move assets out of my estate if California has no estate tax?
Often not. Below the federal exemption, transferring appreciated property out of your estate sacrifices the basis step-up for no offsetting estate tax saving. The analysis turns on the size of the estate, the built-in gain, and how likely the federal exemption is to change.
Can I undo an irrevocable trust I signed years ago?
Possibly. Consent under section 15404, a petition under 15403 or 15409, decanting under the California Uniform Trust Decanting Act, or reformation may be available depending on the facts and who is still living.
Speak With a California Irrevocable Trust Attorney
The Holmes Law advises California clients on whether an irrevocable trust is warranted, drafts ILITs, SLATs, QPRTs, Medi-Cal planning trusts, third-party special needs trusts and charitable trusts, and handles modification, decanting, and administration of existing irrevocable trusts.
To discuss an irrevocable trust, contact the office. You may also want to review our pages on California trusts, CA revocable trusts, CA special needs trusts, CA charitable trusts, and California elder law.