Irrevocable Trust Disadvantages in New York and How to Mitigate Each One

By Albert Goodwin, Esq., New York estate and trust attorney. Last reviewed: 2025. Dollar figures are stated as of 2025 and change annually.

An irrevocable trust is one the grantor generally cannot amend or revoke after signing. That rigidity is what lets the trust protect assets from Medicaid, creditors or estate tax, and it is also the source of most of its drawbacks. This page covers the disadvantages that matter under New York law and pairs each one with the drafting choice that reduces it. For the case in favor of these trusts, see our page on the benefits of a family trust.

The short answer for New York residents

An irrevocable trust usually makes sense in three situations:

• You want to protect a home or savings from nursing home costs and expect to stay healthy for at least five more years.
• Your estate is near or above the New York estate tax exclusion of $7,160,000 for 2025, where the state's "cliff" can tax the entire estate.
• You need to hold assets for a beneficiary who cannot manage them, or who has creditor or divorce exposure.

It is usually a poor fit in other situations:

• You may need to spend the principal yourself.
• Your main goal is avoiding probate. A revocable living trust does that without giving anything up.
• You already need nursing home care within the next five years and have no other plan for the penalty period.
• You hold highly appreciated assets and the trust is drafted in a way that gives up the step-up in basis.

Revocable trust, irrevocable trust and MAPT compared

Disadvantages specific to New York, and how to mitigate each one

1. You can lose the step-up in basis

This is often the most expensive drawback, and it is the one people miss. When you die owning an asset, your heirs receive a basis equal to its value at your death under IRC §1014. If you instead make a completed gift of the asset to an irrevocable trust, the trust takes your original basis under IRC §1015. In Revenue Ruling 2023-2, the IRS confirmed that assets in a completed-gift grantor trust that are not included in your estate do not receive a step-up at death.

Consider a hypothetical. A parent bought a Queens house decades ago for $90,000. It is worth $1,000,000 today. If the house passes at death with a step-up, the children can sell it for close to its value with little or no capital gain. If it sits in a completed-gift trust, the children's basis can be $90,000 plus improvements, and a sale can trigger federal and New York capital gains tax on most of the $910,000 difference.

How to mitigate:

• Retain an interest that causes estate inclusion: In a MAPT, the grantor typically keeps the right to trust income and to live in the home. Under IRC §2036, those retained interests pull the assets back into the taxable estate for basis purposes, so heirs get the step-up. For most estates below the exclusion amounts, inclusion costs nothing in estate tax.
• Make the gift incomplete: A retained limited testamentary power of appointment keeps the transfer from being a completed gift for gift tax purposes, which supports estate inclusion.
• Add a substitution (swap) power: In a trust meant to stay outside your estate, a power under IRC §675(4)(C) to swap assets of equal value lets you trade cash into the trust and take low-basis assets back before death, so those assets receive a step-up in your estate.

2. New York's 3-year gift add-back and the estate tax cliff

New York has no gift tax. That leads some people to fund an irrevocable trust shortly before death expecting to escape New York estate tax. Tax Law §954(a)(3) adds back taxable gifts made within three years of death when computing the New York taxable estate. This provision has been extended several times and carries a scheduled sunset, so confirm whether it applies to a given date of death.

The add-back matters because of New York's cliff. The 2025 basic exclusion amount is $7,160,000. Once a taxable estate exceeds that amount by more than 5 percent, the exclusion is lost entirely and the whole estate is taxed. A gift that is added back can push an estate over that line. New York also has no portability of a deceased spouse's unused exclusion, unlike federal law.

How to mitigate:

• Fund estate-tax trusts early. Gifts made more than three years before death fall outside the add-back.
• Use annual exclusion gifts ($19,000 per recipient in 2025), which are not taxable gifts and are not added back.
• Include a "cliff" clause in the will or revocable trust that directs a charitable gift just large enough to bring the estate under the threshold, when the numbers support it.
• Review advanced New York estate planning techniques when the estate is near the cliff.

3. Property tax exemptions on a home deeded to the trust

Many New York homeowners receive Basic or Enhanced STAR, the senior citizens' exemption under Real Property Tax Law §467, or a veterans' exemption under RPTL §458-a. These exemptions can generally continue when the home is held in a properly drafted trust that keeps the grantor's right to live there. The risk is procedural. When a deed is recorded, the assessor may treat the new owner as a different taxpayer. If no new application is filed, or the trust lacks the right language, the exemption can lapse. A homeowner who loses an older STAR exemption may have to register for the STAR credit instead.

How to mitigate: Draft the trust to reserve the grantor's lifetime right to occupy the home. Record the deed with the assessor's requirements in mind, and file any renewal or new exemption application with the local assessor or the NYC Department of Finance promptly after the transfer.

4. Selling, refinancing or insuring trust-held real estate

You can sell a house held in an irrevocable trust, but the trustee signs the contract and deed, not you. Title companies will ask for the trust instrument or a certification of trust, and closings take longer. Some lenders will not refinance or issue a reverse mortgage on trust-owned property. Federal law at 12 U.S.C. §1701j-3(d)(8) generally bars a lender from calling an existing residential mortgage due because of a transfer to a trust in which the borrower remains a beneficiary and occupant. In practice, lenders still need notice. The homeowner's insurance policy and title insurance should be updated to name the trust or trustee, or a claim may be disputed.

In a MAPT, sale proceeds must stay in the trust. If the trustee hands them to you, the protection is lost for that money.

How to mitigate:

• Give the trustee express power to sell, buy a replacement residence, and mortgage trust property.
• Keep the trust a grantor trust so you can still claim the IRC §121 home-sale exclusion of up to $250,000, or $500,000 for a married couple, if you meet the ownership and use tests.
• Notify the insurer and lender at funding, not after a problem arises.

5. Trustee and family risk

Most families name an adult child as trustee to avoid fees. That choice brings its own risks. The child may mismanage or invest poorly. The child may favor himself or herself over siblings, or simply stop communicating. Trust assets are not the trustee's personal property, so a trustee's personal creditors or divorcing spouse should have no claim to them. Even so, poor record-keeping that mixes trust money with personal funds can invite those disputes. If a trustee dies or becomes incapacitated without a named successor, the family may need a court proceeding to appoint one.

Beneficiaries have remedies. Under the Surrogate's Court Procedure Act, they can petition to compel an accounting, to obtain information, or to suspend or remove a trustee (SCPA 711 and 719). Trustees must also invest prudently under EPTL 11-2.3. These proceedings take time and money, so prevention is cheaper. See our pages on breach of trust and beneficiaries' rights to trust information.

How to mitigate:

• Name co-trustees or at least two successor trustees.
• Appoint a trust protector, someone other than the trustee. The trust instrument can give that person power to remove and replace trustees, correct drafting errors, or adjust administrative terms. New York has no trust protector statute, so these powers must be spelled out in the document itself.
• Require annual written accountings to all beneficiaries.
• Consider a professional or bank trustee where the family dynamics call for it, accepting the fees that come with one.

6. Divorce: New York's automatic revocation rule does not apply

Under EPTL 5-1.4, a divorce automatically revokes many dispositions to a former spouse. These include gifts in a will, revocable trust provisions, and beneficiary designations. The statute covers revocable dispositions only. If you create an irrevocable trust for your spouse and later divorce, your former spouse can remain a beneficiary unless the trust itself says otherwise.

How to mitigate: Draft a divorce clause. One approach defines "spouse" as the person you are married to at the time, a so-called floating spouse. Another ends a spouse's interest automatically on divorce, separation, or the filing of a divorce action. A trust protector power can also help. For a beneficiary child's own divorce, a discretionary spendthrift trust keeps distributions in the trustee's hands. That makes the assets harder for the child's spouse to reach.

7. Income tax at compressed trust rates

A non-grantor irrevocable trust pays its own income tax. Trust brackets are compressed. For 2025, a trust reaches the top 37 percent federal rate at roughly $15,650 of retained taxable income, far below the threshold for an individual. The trust must also file a federal Form 1041 and, for a New York resident trust, Form IT-205 each year.

How to mitigate: Draft the trust as a grantor trust. Income is then reported on your own return at your individual rates. A swap power or a retained income interest usually achieves this. Most MAPTs are grantor trusts for this reason. Where a non-grantor trust is the goal, distributing income to beneficiaries in lower brackets shifts the tax to them.

8. Gift tax reporting: complete versus incomplete gifts

Moving assets into an irrevocable trust is a gift for federal purposes only if the gift is complete, meaning you have kept no power over who ultimately receives the property. A completed gift above the annual exclusion requires a federal gift tax return, Form 709. No tax is usually owed, because the gift simply uses part of your lifetime exemption ($13,990,000 per person in 2025).

Most New York MAPTs are drafted as incomplete gifts. The grantor keeps a limited power of appointment or a similar retained power, which preserves the step-up in basis and avoids a taxable gift. These trusts still count as transfers for Medicaid purposes, because Medicaid and the IRS apply different tests. Some practitioners file a Form 709 anyway to disclose an incomplete transfer. Whether that makes sense depends on the assets and the drafting. New York itself has no gift tax, subject to the 3-year add-back described above.

9. Cost, and the cost of not planning

An irrevocable trust costs more to create than a simple will. The work includes tax analysis, a deed if real estate is involved, retitling of accounts, and sometimes a gift tax return. Non-grantor trusts also carry yearly tax preparation costs, and a professional trustee charges fees. Commissions for New York trustees are set by SCPA 2309 unless the trust instrument provides otherwise.

That cost should be weighed against the risk the trust addresses. Medicaid's own penalty divisor reflects the average monthly cost of a nursing home. In New York City and on Long Island, that figure has exceeded $13,000 per month in recent years. A single year of private-pay care can cost many times what a carefully drafted trust costs to create. If your goals are probate avoidance or incapacity planning rather than asset protection, a revocable trust or a will may cost less and do the job. Our guide to avoiding probate in New York compares the options.

Medicaid Asset Protection Trusts: the timing disadvantage

A MAPT protects assets from nursing home Medicaid only after the transfer clears the 60-month look-back under Social Services Law §366(5). A transfer inside that window creates a penalty period. The penalty is calculated by dividing the transferred value by a regional divisor that the Department of Health publishes each year under 18 NYCRR 360-4.4(c).

Here is a hypothetical. A $260,000 transfer divided by a $13,000 regional divisor produces a 20-month penalty period. The divisors differ for New York City, Long Island, the Northern Metropolitan region and upstate regions, and they change each January. Before relying on any estimate, check the current figures in the Department of Health's General Information System (GIS) messages.

The State enacted a 30-month look-back for community (home care) Medicaid in 2020. As of this review, it has repeatedly delayed implementation and has not begun applying the look-back to community Medicaid applications. Confirm the current status before planning around it.

Two more MAPT drawbacks deserve mention. First, income the trust earns is usually paid to you and still counts toward Medicaid's income limit. Second, New York's estate recovery program under Social Services Law §369 currently reaches only probate assets. A properly funded MAPT avoids probate, but a defective trust or a late transfer can leave the asset exposed. For a fuller comparison of trust types, see our New York trust attorney page.

Changing an irrevocable trust after it is signed

New York gives you several routes to change an irrevocable trust. Each has limits.

• Consent of grantor and beneficiaries (EPTL 7-1.9): Under EPTL 7-1.9, the grantor and every person beneficially interested can sign a written consent to revoke or amend the trust. This route ends at the grantor's death, because it requires the grantor's consent. It is also impractical when a beneficiary is a minor, is incapacitated, or refuses to sign. In a MAPT, returning principal to the grantor makes it countable again.
• Decanting (EPTL 10-6.6): A trustee with authority to invade principal can pour the assets into a new trust with updated terms under EPTL 10-6.6. The statute requires written notice to the grantor, if living, and to the beneficiaries. If the trustee's power to invade is limited by a standard such as health or support, the new trust must keep the beneficial interests substantially the same. Decanting remains available after the grantor's death.
• Limited power of appointment: Reserving to yourself, or giving a beneficiary, a power to redirect assets among a defined class, such as your descendants, builds flexibility into the document. It does not make the assets countable for Medicaid or give the grantor access to principal.
• Trust protector: As described above, a protector can fix administrative problems and replace trustees without going to court.
• Court reformation or construction: The Surrogate's Court can construe ambiguous terms or correct a drafting mistake. This is the slowest and most expensive option.

Two hypothetical scenarios

The following examples are hypothetical. They illustrate common planning errors and do not describe any particular client.

The trust funded too late: A widower in Nassau County signs a MAPT and deeds his home to it. Fourteen months later he needs nursing home care. Because the transfer falls inside the 60-month look-back, Medicaid imposes a penalty based on the home's value divided by the Long Island divisor. The family must pay privately during that period or use another strategy. Had the trust been funded years earlier, the house would have been protected.

The lost step-up: A Manhattan couple gives appreciated stock to an irrevocable trust for their children. The trust is drafted as a completed gift with no swap power. Their estate was well below both federal and New York exclusions, so the trust saved no estate tax. When the children later sell the stock, they inherit the couple's original basis and owe capital gains tax that a step-up would have eliminated.

Frequently asked questions

Can I be my own trustee of an irrevocable trust in New York?

For a MAPT, generally no. A grantor acting as trustee with access to principal risks having the assets treated as available to the grantor for Medicaid purposes. For an estate-tax trust, serving as your own trustee can pull the assets back into your estate, depending on the powers you hold. A child, another relative or a professional usually serves as trustee, and you may keep limited, carefully defined powers.

Can I sell my house if it is in an irrevocable trust?

Yes, if the trust gives the trustee power to sell. The trustee signs the deed. In a MAPT, the proceeds stay in the trust and can buy a replacement home or be invested. If the trust is a grantor trust and you meet the ownership and use tests, you can still claim the IRC §121 capital gains exclusion.

What happens to an irrevocable trust in a divorce in New York?

EPTL 5-1.4 automatically revokes revocable dispositions to a former spouse. It does not reach irrevocable trusts. Unless the trust contains a divorce clause or a floating-spouse definition, a former spouse may remain a beneficiary. Whether a trust created during the marriage affects equitable distribution is a separate question for the matrimonial court.

Does an irrevocable trust protect assets from nursing home costs?

A properly drafted and funded MAPT protects the transferred principal from nursing home Medicaid once 60 months have passed since the transfer. It does not protect assets transferred within that window, and income paid to you remains countable. Protection also depends on the trust's terms, so a trust that lets you reach principal will not work.

Are irrevocable trusts public in New York?

A trust instrument is generally not filed with any court, although a deed to the trust is recorded. See are trusts public record.

Getting advice before you sign

Most of the disadvantages on this page can be reduced by drafting choices made before the trust is signed. Fewer can be fixed afterward. If you are weighing an irrevocable trust, a review should cover your health outlook, the basis of the assets you plan to transfer, your estate's size relative to the New York cliff, any property tax exemptions on your home, and who will serve as trustee. If you are comparing trust types, our page on the pros and cons of a testamentary trust covers trusts created by will.

We can help you decide whether an irrevocable trust fits your situation. Call 212-233-1233 or email [email protected].

This page is general information about New York law as of the review date above. It is not legal or tax advice for your situation.