Revocable vs Irrevocable Living Trusts And Estate Planning: The OBBBA Impact

Key Takeaways

• The One Big Beautiful Bill Act (OBBBA) permanently set federal estate tax exemptions at $15 million per person ($30 million for couples).
• Revocable trusts provide control and privacy but no estate tax savings.
• Irrevocable trusts remove assets from an estate but usually mean giving up permanent control.
• Starting in 2026, charitable gifts face a new 0.5% AGI floor for itemizers, but a $2,000 universal deduction for non-itemizers.
• A recent IRS ruling means assets in certain irrevocable trusts may no longer get a "step-up" in basis, which could lead to higher capital gains taxes for heirs.

Estate planning began to see major shifts when the One Big Beautiful Bill Act became law in July 2025. For families who have dealt with years of expiring tax laws, OBBBA provides a permanent set of rules. This allows for long-term planning without worrying about the next "legislative cliff."

The $15 Million Exemption

The most discussed change under OBBBA is the federal estate and gift tax exemption. As of January 1, 2026, this amount is permanently set at $15 million per individual. For married couples, this creates a combined $30 million exemption that can be passed to children or grandchildren without federal estate taxes.

The Generation-Skipping Transfer (GST) tax exemption also moved to $15 million. This opens doors for "dynasty trusts" and other ways to protect wealth for multiple generations. Because these exemptions will still adjust for inflation, families can make decisions today knowing the rules will likely remain stable.

Revocable Trusts: Control and Privacy

Revocable living trusts are common because they are easy to manage. Full control is maintained while the grantor is alive, and the trust can be changed or ended at any time.

• Assets Stay in the Estate: Because the trust can be canceled, the IRS treats these assets as belonging to the grantor. This means revocable trusts do not reduce estate taxes.
• Avoiding Probate: In Oklahoma, probate can be slow and expensive. Assets in a revocable trust bypass the court, keeping a family's business private and saving on legal fees.
• The "Chicken and Egg" Factor: Estate planners coordinate these trusts with income-focused investing. The goal is to set up trusts so families can "eat the eggs" (the dividends and interest) while protecting the "chicken" (the principal).

Irrevocable Trusts: Protection vs. Control

Irrevocable trusts operate differently. Once assets are moved into one, they generally cannot be taken back or the terms changed.

• Removing Assets from Taxes: These transfers are treated as gifts. Under the new $15 million limit, significant wealth can be moved out of a taxable estate so all future growth happens outside the reach of the IRS.
• The Step-Up Basis Trade-Off: A major change came with IRS Revenue Ruling 2023-2. It clarifies that assets held in an irrevocable trust that are not included in a taxable estate might not receive a "step-up" in basis at death. This means heirs could owe more in capital gains taxes when those assets are sold.

Special Needs Trusts and Medicaid Tensions

The OBBBA includes approximately $1 trillion in projected cuts to Medicaid over the next decade, which will likely lead to tighter eligibility rules and more frequent documentation checks. For families with differently-abled beneficiaries, Special Needs Trusts (SNTs) remain a vital tool to ensure that an inheritance does not disqualify a loved one from essential government programs like SSI or Medicaid. These trusts allow for the provision of "quality of life" expenses—such as specialized equipment or travel—while navigating the new $1 million home equity cap and stricter community engagement requirements mandated by the act.

New Charitable Rules for 2026

OBBBA also changes how credit is received for giving to charity.

• The 0.5% AGI Floor: Itemizers can only deduct gifts that exceed 0.5% of Adjusted Gross Income.
• The Universal Deduction: Non-itemizers can still deduct up to $2,000 for married couples ($1,000 for singles) for cash gifts. This makes tax-efficient giving available to more families.

Durable Power of Attorney in a Complex Environment

Beyond tax shifts, the OBBBA introduces administrative complexities, such as 6-month Medicaid redetermination cycles for seniors and differently-abled. A Durable Power of Attorney (DPOA) empowers a trusted agent with the legal authority to manage these requirements and other financial affairs if the principal becomes incapacitated. Without a DPOA in place, families may face lengthy and expensive court intervention to obtain guardianship, which can be particularly damaging when trying to meet the act's new, shorter windows for retroactive Medicaid coverage.

Estate planning goes beyond an expert reviewing and filing legal documents; the goal should be to make the money actually last. The best way to decide on the right type of trust for asset protection is to work with a fiduciary firm that focuses on your best interests.

*Disclaimer: This article is for informational purposes only and does not constitute financial, investment, tax, or legal advice. Financial situations vary, and laws are subject to change. Contact Melia Group for personalized guidance tailored to your specific needs and goals.

Melia Advisory Group
City: Tulsa
Address: 5424 S Memorial Dr
Website: https://www.meliagroup.com/