A Texas irrevocable trust is a trust that the settlor generally cannot revoke or freely amend once it is signed and funded. Giving up that control is the point: it can move assets and future appreciation out of the settlor’s taxable estate, keep life insurance proceeds out of the estate, create multigenerational trusts that last for centuries, and in some cases help with long-term care planning. Texas law shapes each of these strategies in specific ways, starting with the rule that a Texas trust is revocable unless it expressly says it is not.
This page covers how Texas irrevocable trusts are created, whether Texas allows self-settled asset protection trusts, life insurance trusts, spousal lifetime access trusts and the community property issues they raise, dynasty trusts under Texas’s 300-year rule, Medicaid planning trusts, and how irrevocable trusts can be changed. For the general framework of Texas trust law, see the Texas trusts overview, and for the broader plan, the Texas estate planning hub.
What Makes a Trust Irrevocable in Texas
Texas presumes revocability. Under Property Code § 112.051, a settlor may revoke a trust unless it is irrevocable by the express terms of the instrument creating it or of an instrument modifying it. A Texas irrevocable trust must therefore say, clearly and unambiguously, that it is irrevocable. A trust that fails to do so can be treated as revocable, and its assets may be pulled back into the settlor’s estate for tax purposes and exposed to the settlor’s creditors.
Irrevocable does not mean frozen. Texas law allows irrevocable trusts to be changed through court modification under Property Code § 112.054, through decanting under the provisions beginning at § 112.071, and through powers built into the trust, such as trust protector powers and powers of appointment. Those tools are discussed below.
Does Texas Allow Self-Settled Asset Protection Trusts?
No. Texas does not recognize domestic asset protection trusts. Under Property Code § 112.035(d), if the settlor is also a beneficiary of the trust, a spendthrift provision does not prevent the settlor’s creditors from satisfying claims from the settlor’s interest in the trust estate. A Texan cannot create an irrevocable trust for his or her own benefit in Texas and expect it to be protected from future creditors.
Out-of-state asset protection trusts
Some states, such as Nevada, Delaware, and South Dakota, permit self-settled asset protection trusts. A Texas resident can create a trust under another state’s law, but whether a Texas court would respect that choice of law against a Texas creditor, particularly for assets located in Texas, is uncertain. Bankruptcy law also allows a trustee to reach transfers to self-settled trusts made with intent to hinder, delay, or defraud creditors within a ten-year look-back. Holmes Law discusses these risks candidly with anyone considering this approach.
The spousal trust exception
Texas does provide a narrow statutory path. Under Property Code § 112.035(g), a settlor is not treated as a beneficiary of certain irrevocable trusts for a spouse merely because the settlor may benefit after the spouse’s death. This applies to qualifying irrevocable inter vivos marital trusts and to other qualifying irrevocable trusts for the spouse’s benefit. That provision is important for spousal lifetime access trusts, discussed below.
Texas’s own protections
Texans often have less need for self-settled trusts because Texas exemption law is generous. The homestead exemption in Property Code chapter 41 is based on acreage rather than a dollar cap, and many retirement accounts, the cash value of life insurance, and annuities receive broad protection under state law. Asset protection planning in Texas starts with those exemptions and with trusts created for others.
Irrevocable Life Insurance Trusts in Texas
An irrevocable life insurance trust, or ILIT, owns life insurance on the settlor’s life. When structured and administered correctly, the death benefit is not included in the settlor’s taxable estate and passes to beneficiaries under the trust’s terms rather than outright.
Key points for Texas ILITs include:
- The trust must be expressly irrevocable under § 112.051.
- If an existing policy is transferred to the ILIT and the insured dies within three years, the proceeds are generally included in the estate under Internal Revenue Code § 2035. Having the trustee apply for a new policy avoids that issue.
- Premiums are usually paid through gifts to the trust. Crummey withdrawal notices allow those gifts to qualify for the annual gift tax exclusion.
- The settlor should not serve as trustee or hold incidents of ownership in the policy.
- When the insured is married, the character of the premium payments matters. Premiums paid with community funds can raise questions about whether the non-insured spouse made gifts to the trust, which should be addressed when the trust is designed.
The federal estate tax reaches only a small fraction of estates today, so an ILIT is not only a tax tool. It also keeps proceeds in trust for minor children, protects proceeds from beneficiaries’ creditors, and provides liquidity to buy assets from the estate or pay debts.
Spousal Lifetime Access Trusts in Texas
A spousal lifetime access trust, or SLAT, is an irrevocable trust one spouse creates for the other spouse and often for descendants. The assets and their future growth are removed from both spouses’ taxable estates, while the beneficiary spouse can receive distributions, which indirectly benefits the household.
The community property problem
A SLAT only works if the settlor funds it with his or her own separate property. If a Texas SLAT is funded with community property, the beneficiary spouse is treated as a partial settlor, which can cause estate inclusion and defeat the plan. Texas couples usually first partition community property into each spouse’s separate property through a written partition agreement under Family Code § 4.102. The separate property of one spouse then funds the SLAT.
Partition has real consequences. Separate property does not receive the community property double step-up at the first death, and the partition affects what each spouse owns if the marriage ends. Those tradeoffs deserve careful discussion before any agreement is signed.
Protection for the settlor after the spouse’s death
Property Code § 112.035(g) allows a qualifying SLAT to provide for the settlor after the beneficiary spouse dies without the settlor being treated as a beneficiary for spendthrift purposes. This is one of the few ways a Texas settlor can retain a potential future benefit in a protected trust.
Reciprocal trusts and divorce risk
When both spouses create SLATs for each other, the trusts must be meaningfully different to avoid the reciprocal trust doctrine. Divorce is another consideration: the beneficiary spouse may continue to benefit from a SLAT after the marriage ends, and Estates Code § 123.052 revocation rules for revocable trusts do not undo an irrevocable gift. Many SLATs define “spouse” in a way that addresses this possibility.
Dynasty Trusts and the Texas 300-Year Rule
The Texas Constitution, Article I, § 26, prohibits perpetuities. Property Code § 112.036 historically applied the common-law rule, limiting trusts to lives in being plus 21 years. In 2021, the Legislature amended § 112.036 so that for a trust created on or after September 1, 2021, an interest must vest within 300 years after the effective date of the trust.
That change allows Texans to create dynasty trusts that benefit many generations without relocating the trust to another state. A dynasty trust can shelter assets from beneficiaries’ creditors and divorcing spouses under the Texas spendthrift statute, and, with allocation of the generation-skipping transfer tax exemption, can keep assets outside the federal transfer tax system for its duration.
Because a dynasty trust may last for centuries, the drafting must anticipate change. That means well-defined trustee succession, trust protector powers, flexible distribution standards, and the ability to move the trust’s situs or administration if circumstances require.
Texas Medicaid Planning Trusts
Irrevocable trusts are sometimes used to plan for the cost of long-term care. Two structures are most relevant in Texas.
Irrevocable income-only trusts
An income-only trust holds assets in trust with the settlor entitled to income but not principal. When established more than 60 months before an application for long-term care Medicaid, the principal may not be counted as an available resource. Transfers within the 60-month federal look-back can result in a penalty period. These trusts must be drafted carefully so that no trustee discretion can distribute principal to the settlor.
Qualified income trusts
Texas uses an income cap for certain long-term care Medicaid programs. A person whose income is above the cap may qualify by directing income into a qualified income trust, sometimes called a Miller trust. The trust must meet federal and Texas Health and Human Services Commission requirements, and the state must be named to receive funds remaining at death, up to the amount of Medicaid benefits paid. A qualified income trust is a narrow administrative tool, not an asset protection trust.
Estate recovery
Texas operates a Medicaid Estate Recovery Program through the Texas Health and Human Services Commission. Planning for the family home often involves an enhanced life estate deed, sometimes called a Lady Bird deed, rather than a trust. The interaction between trusts, deeds, and estate recovery is covered on the Texas elder law page.
Grantor Trust Status, Gift Tax, and Basis
Many irrevocable trusts are designed as grantor trusts for income tax purposes, so the settlor pays the income tax on trust earnings. That allows the trust to grow without being reduced by income taxes, which is effectively an additional tax-free transfer. Because Texas has no personal income tax, the income tax discussion for Texas trusts is almost entirely federal.
Funding an irrevocable trust is generally a completed gift, reportable on a federal gift tax return when it exceeds the annual exclusion. Assets given to an irrevocable trust do not receive a new basis at the settlor’s death under Internal Revenue Code § 1014 unless included in the estate. For low-basis assets, particularly community property that would otherwise get a double step-up, the loss of that step-up can outweigh the estate tax benefit for many Texas families. Some trusts include provisions that allow assets to be pulled back into the estate if that becomes advantageous.
Trustees, Advisors, and Trust Protectors
The choice of trustee matters more for an irrevocable trust than for any other. Texas permits the trust instrument to divide responsibilities among a trustee, an investment advisor, a distribution advisor, and a trust protector, and Property Code § 114.0031 addresses their respective duties and liabilities. A trust protector can be given power to correct drafting errors, change administrative terms, or change the trust’s governing law, which adds flexibility without giving the settlor retained control.
Funding and Administering a Texas Irrevocable Trust
An irrevocable trust accomplishes nothing until it is funded, and it keeps working only if it is administered correctly. The trustee should obtain a federal tax identification number, open accounts in the trust’s name, and keep trust assets entirely separate from the settlor’s property. For life insurance trusts, the trustee should send withdrawal notices each time a gift is made and keep copies. For trusts holding Texas real estate, a deed to the trustee should be recorded in the county where the property lies.
Texas trustees of irrevocable trusts owe the full range of duties under the Trust Code, including the duty to keep beneficiaries reasonably informed under Property Code § 113.060 and to account on demand under § 113.151. Sloppy administration, such as the settlor using trust property without paying for it, can undermine both the tax and creditor protection goals of the trust.
Changing a Texas Irrevocable Trust
Texas provides several ways to adjust an irrevocable trust:
- Judicial modification under Property Code § 112.054, including when circumstances not anticipated by the settlor make modification further the trust’s purposes or when modification is necessary to achieve the settlor’s tax objectives.
- Decanting under the provisions beginning at § 112.071, which lets a trustee with distribution authority distribute assets into a new trust, subject to 30 days’ written notice under § 112.074 and statutory limits.
- Powers of appointment, which allow a beneficiary to redirect assets within limits the settlor sets.
- Trust protector powers, when the trust grants them.
These tools make it possible to fix problems and respond to changes in tax law or family circumstances. They do not make an irrevocable trust a substitute for careful drafting at the outset.
Frequently Asked Questions
Can I create an asset protection trust for myself in Texas?
Generally no. Under Property Code § 112.035(d), a spendthrift clause does not protect a settlor who is also a beneficiary. Out-of-state asset protection trusts exist, but their effectiveness for Texas residents is uncertain.
Is a Texas trust irrevocable if it does not say so?
No. Under Property Code § 112.051, Texas trusts are revocable unless expressly made irrevocable. An irrevocable trust must say so clearly.
How long can a Texas dynasty trust last?
For trusts created on or after September 1, 2021, interests must vest within 300 years under Property Code § 112.036.
Can we fund a SLAT with community property?
It is generally not advisable. Texas spouses usually partition community property into separate property under Family Code § 4.102 before funding a SLAT, to avoid the beneficiary spouse being treated as a settlor.
Will an irrevocable trust protect my home from Texas Medicaid?
It can in some cases if established well before the 60-month look-back, but other tools, such as enhanced life estate deeds, are often used for the home. Medicaid planning should be coordinated with elder law advice.
Can an irrevocable trust in Texas ever be changed?
Yes, through court modification, decanting, powers of appointment, or trust protector powers, depending on the trust terms and circumstances.
Speak With a Texas Irrevocable Trust Attorney
Holmes Law designs irrevocable trusts for Texas clients, including life insurance trusts, SLATs, dynasty trusts, and long-term care planning trusts, with attention to community property and Texas-specific statutes. Michael Holmes is licensed in Texas and works remotely with clients statewide. To discuss an irrevocable trust, contact Holmes Law. You may also want to review Texas special needs trusts and Texas charitable trusts, or learn more about elder law.