Trusts are great tools for you to pass assets to your heirs, whether that be to children, other family members, or charities. However, not all trusts are created equally. Sometimes, we use revocable trusts for one client, while another client established an irrevocable trust. When does it make sense to use a revocable trust compared to an irrevocable trust?
A revocable trust allows the grantor (you, the person establishing the trust) to revoke (amend or change) the trust, thus having legal access to the assets funding the trust. Most clients use revocable trusts to help avoid probate court. Also, many choose to keep the revocable trust unfunded until their death. On their accounts, they would have the revocable trust as a beneficiary and at death, the account would be transferred to the revocable trust. A revocable trust provides no Medicaid protection as the government “sees through” the trust as if you own the assets yourself.
An irrevocable trust does not allow the settlor (you) to revoke, change, or amend the trust. In my legal practice, I use irrevocable trusts for Medicaid planning. You would transfer real estate or money to an irrevocable trust and then choose a trustee to manage the funds, but you cannot be a beneficiary of the trust. Essentially, you transfer all possession, control, and ownership of your assets to the irrevocable trust. Any asset funding an irrevocable trust is not considered an available resource for Medicaid purposes, so long as the grantor has no right to distribution of income or principal from the trust and the assets were transferred to the trust five years prior to applying for Medicaid. The trust can only benefit named beneficiaries and the trustee of the irrevocable trust must manage the trust in a way that only benefits the beneficiaries, not you the settlor.
Establishing the right trust for you can be tricky and discussing the pros and cons with an experienced elder law attorney will put you at ease, helping you pick which option works best for you and your family.