Revocable and Irrevocable Trust Comparison

Want to avoid probate? Want it to protect assets? Want to make things easier for your family should you pass away? Everyone’s answer is yes, so here is a comparison of revocable and irrevocable trusts.

The obvious difference is that “revocable” means you can change it or terminate it at any time, as long as you are still alive and capable. You cannot revoke an irrevocable trust. The most critical difference is that a revocable trust does not protect your assets if you or your spouse need Medicaid or VA or Connecticut programs to pay for long term care, at home, or in a nursing home. That’s because if you can revoke it, and take the assets back, the state quite logically says that asset is still yours. So if the goal is to protect assets in case of long term sickness, a revocable trust does not help. For that, you need an irrevocable trust.

Revocable and irrevocable trusts both avoid probate, and that is a positive. Upon death, assets pass to heirs more quickly and are not public records, so there is privacy. Those nosy relatives who are not named beneficiaries in the trust will not know your family’s business. Also, the money in the trust is immediately available to pay your funeral and other expenses and you can name backup trustees to handle the money should you die or become incapable. If the goal is to have simplicity and avoid probate and you are not worried about long term care, a revocable trust makes sense. It can also be used to control assets for your children, even if they are adults, until they get to the ages where they will be fully capable of using good judgment spending their inheritance.

If you are worried about long term care, and preserving assets for your family, then an irrevocable asset protection trust is needed. You can’t give assets away today and expect Medicaid to pay for you tomorrow, as there is a five year look back period when the state looks at the transfer into the trust, and imposes a penalty period of one month for every $13,143 you put into the irrevocable trust. If you gave away $131, 430, and divide that by $13,143 per month, that results in a 10 month penalty period that Medicaid won’t pay for you. But if assets were put into the trust more than five years ago, there is no penalty.

A downside of the irrevocable trust is that it cannot pay your assets back to you. If it could, the state would say, those assets will count as yours and not be protected. Assets can only be paid to family members or others you specify. It should have tax provision that keep your $250,000 capital gains tax exemption if you sell your house, and also give your heirs a step up in the tax basis if real estate and stocks are sold after your death, so your heirs will not have any capital gains tax.

Get knowledgeable, professional advice on the upsides and downsides of trusts for estate planning, long term planning, or simply having a trusted child handle your assets if you become incapable. An appropriate living trust can be incredibly valuable for you and your family, during your lifetime, or after. Decide what type of trust will serve your needs, and sleep better at night.