The Dangers of an Irrevocable Trust in California

Irrevocable trusts are legitimate tools that are routinely sold to people who should not have one. This is the honest list of what can go wrong, written for someone who has been told they need one and wants to understand the cost before signing.

1. Losing the basis step-up, which is usually the biggest number

A completed gift into an irrevocable trust generally removes the asset from your taxable estate, and with it the basis adjustment at death. Your children inherit your original basis instead of a date-of-death basis.

For a California family this is frequently the whole ballgame. A home bought decades ago and now worth well over a million dollars carries an enormous embedded gain. Keeping it in your estate preserves the step-up and erases that gain at death. Giving it away during life does not. People accept this trade to solve a risk that was never likely, and their children pay for it in capital gains tax.

2. You cannot easily change your mind

Circumstances change. A beneficiary develops an addiction, a marriage ends, a child becomes disabled, you need the asset back. California does provide routes to modify or terminate in defined circumstances, including consent of the settlor and all beneficiaries and petitions where circumstances have changed, but these are court-adjacent processes with real cost and no guaranteed outcome. Assume you cannot undo it.

3. You lose control, genuinely

If you keep too much control the structure fails at what it was built to do. If you give up enough control for it to work, you have actually given up control. There is no version where you keep the benefit and get the protection. Anyone selling you that is selling something else.

4. Medi-Cal timing is not what people think

A transfer can affect eligibility, and California’s look-back is 30 months. California did not adopt the 60-month federal period that dominates online discussion, so much of the advice circulating is the wrong number for this state. Also worth knowing before paying for protection: California’s estate recovery is limited to the probate estate under SB 833, which is narrower than many states, and the asset test returned 1/1/26 under AB 116 § 59 at $130,000 individual and $195,000 couple.

5. Separate tax filings and ongoing cost

Depending on how it is structured, the trust may need its own taxpayer identification number and its own annual return, with compressed trust tax brackets that reach the top rate at a very low level of income. That is an ongoing administrative cost nobody mentions at the sales meeting.

6. Creditor protection that may not be there

California does not offer self-settled asset protection the way a few other states do. Fund a trust with your own assets and keep the benefit, and your creditors are generally not blocked. Trusts funded for someone else are a different matter, and that distinction does most of the work people attribute to the word irrevocable.

When it is still the right tool

Life insurance held outside a taxable estate. Special needs planning, where the beneficiary must not control the assets. Certain charitable structures. Estates large enough that transfer tax is a live problem rather than a hypothetical one, which given the $15,000,000 federal exemption for 2026 under OBBBA is a small group.

For a typical California family with a house, retirement accounts, and adult children, a revocable trust usually does the work, keeps the step-up, and stays changeable. See revocable vs irrevocable trusts in California.

General information about California law, current as of July 2026. Not legal advice.

Frequently Asked Questions

Why is the basis step-up usually the biggest number?

Assets you still own at death get a stepped-up basis to date-of-death value, which erases the built-in capital gain. Assets you gave away into an irrevocable trust during life generally carry your original basis to the trust. For a California family whose main asset is a house bought decades ago, that difference can be several hundred thousand dollars of gain that would have simply vanished had the property stayed in a revocable trust.

Does an irrevocable trust protect my house from Medi-Cal?

Not the way people are told. California recovers only against the probate estate, under W&I Code § 14009.5 since 2017, so a fully funded revocable living trust already defeats estate recovery without giving anything away. The irrevocable trust is aimed at eligibility, which is a different question, and there it has real timing constraints and real costs. Most families are sold the irrevocable version to solve a problem the revocable one already solves.

What are the current Medi-Cal asset limits?

$130,000 for an individual and $195,000 for a couple, reinstated effective January 1, 2026 under AB 116. Those run only through June 30, 2027. SB 164 repealed and replaced W&I Code § 14005.62 to set $21,000 individual and $31,000 couple, operative no sooner than July 1, 2027. That date is a floor rather than a certainty: it requires the DHCS director to certify systems readiness in writing, requires federal approval, and existing beneficiaries aren’t affected until their first annual redetermination after it takes effect.

Can an irrevocable trust ever be changed?

Sometimes, and never casually. California allows modification by consent of the settlor and all beneficiaries under Prob. Code § 15404, court modification for changed circumstances under § 15409, and decanting into a new trust under the Uniform Trust Decanting Act. Each of those is a proceeding or a negotiation, each has cost, and none of them is available on demand. Plan as though the terms are permanent.

Is the creditor protection real?

Against your own future creditors, generally yes, provided the transfer wasn’t a fraudulent transfer under the Uniform Voidable Transactions Act and enough time has passed. Against creditors you already have, no. California also does not recognize domestic asset protection trusts for its own residents, so a self-settled trust where you remain a beneficiary gives you far less protection here than the marketing suggests.

When is it genuinely the right tool?

When the estate is large enough that the federal exclusion is actually in play, currently $15,000,000 per person, and moving appreciation out of the estate is worth giving up the basis step-up. Also for life insurance held in an ILIT, for a special needs beneficiary, and for a few charitable structures. Outside those, the revocable trust does the work most California families need.