Revocable vs. Irrevocable
Unlike a revocable living trust (which the grantor can change or dissolve at any time), an irrevocable trust permanently transfers assets out of the grantor's estate and control. This makes it a powerful tool for estate tax reduction — but it requires giving up ownership.
Common Uses of Irrevocable Trusts
- Bypass Trust / Credit Shelter Trust — shelters assets from the surviving spouse's taxable estate
- Irrevocable Life Insurance Trust (ILIT) — keeps life insurance proceeds out of the taxable estate
- Charitable Remainder Trust (CRT) — provides income stream while reducing estate and income taxes
- Grantor Retained Annuity Trust (GRAT) — transfers appreciated assets at reduced gift tax cost
- Special Needs Trust — provides for a disabled beneficiary without disqualifying them from government benefits
The Stepped-Up Basis Tradeoff
Assets in an irrevocable trust typically do NOT receive a stepped-up basis at the grantor's death (because they are already outside the taxable estate). This creates a significant tradeoff with the estate tax benefit — appreciated assets may carry large embedded gains for beneficiaries. This is why coordination with a CPA is essential before transferring appreciated California real estate to an irrevocable trust.
Disclaimer: This glossary entry is for general educational purposes only and does not constitute legal or tax advice. Laws change frequently and vary by individual circumstances. Consult a licensed California attorney or CPA for guidance on your specific situation.