Revocable and Irrevocable Trusts

A Trust is a tool you may consider creating as part of your estate planning. There are many reasons one may make sense for you. For example, if you want to delay someone’s inheritance, perhaps because there is a special needs situation, or you think the beneficiary should be at least 25 or 30 years of age, or older before being given their inheritance directly to make their own decisions (and perhaps mistakes). Perhaps you fear your child’s marriage may not last much longer. Those are typical reasons. However, a trust can also be used to simplify probate and/or for asset protection for you, not just the inheritance of others. That is less known, but very helpful. Trusts are a more common tool than you may realize!

There are two types of trusts most people would consider creating for themselves. The first is a revocable trust. This type is extremely flexible. You can create and run the trust by yourself. Often, two spouses create and run their family trust together. The creator(s) of a revocable trust keep the right to change the rules in any way, at any time. If you put anything in the trust, you have the ability to take it right back. You still have absolute control over the assets.

However, because you have the right to take from the trust at any time, the trust does not give asset protection. If you are sued after a car accident the revocable trust assets can become at risk because they are in effect yours. If you or your spouse ever need long term care, those assets are again not protected, and would be counted as part of a Medicaid spenddown, if you ever need that program to pay for caregivers in the home or in a facility.

An Irrevocable Trust can give asset protection if it has the correct terms to do that. Irrevocable means you cannot take anything back. It does NOT mean you can’t change things. Whatever you put in the trust will stay in there until the day you allow it to be given to a beneficiary. But the creator of the trust, or their spouse, cannot be a beneficiary if you want to protect the assets under Medicaid rules. This alarms many people, and rightfully. You may think, the money is as good as gone! Right? If that were true, many fewer people would create them. Think of it as a safety deposit box. The teller at the bank (your Independent Trustee in this case) has to let you into the box. There are controls in place about your access. But no one else can get in, either.

Irrevocable Trusts can allow you the right to maintain control of the assets. For example, if you place your house in the trust it can still be sold, and the proceeds can be used to purchase a new house or condo. If you have investments in the trust, you can stay with your advisor, and open CDs or any other type of account. What you lose is only the right to TAKE from the trust. However, you can still GIVE from the trust. For this reason you would never put everything in. Instead, you would choose the “nest egg” assets such as your house or a brokerage account that you do not need to meet your regular expenses.

Assets that are in an appropriate Irrevocable Trust at least 5 years are completely protected from the Medicaid rules, which means those assets do not have to be spent before the program can pay for your caregivers. More importantly, you can change who inherits them through the years, and they are not sitting in your children’s names for years. So if those children get sick, sued, divorced, or have any other manner of bad fortune, your assets are still safe.