Do You Need a Revocable or an Irrevocable Trust?

It’s not always obvious which type of trust is the best for an individual, says a recent article titled “Which is Best for Me: A Revocable or Irrevocable Trust?” from Westchester & Fairfield County Business Journals.

In a revocable living trust (RLT), the creator, known as the “grantor,” benefits from the trust and can be the sole Trustee. While living, the grantor/trustee has complete control of the real estate property, bank accounts, or investments placed in the trust. The grantor can also amend, modify and revoke the trust.

The goal of a revocable trust is mainly to avoid probate at death. Probate is the process of admitting your last will and testament in the court in the county where you lived to have your last will deemed legally valid. This is also when the court appoints the executor named in your last will. The executor then has access to the estate’s assets to pay bills and distribute funds to beneficiaries as documented in the last will.

Probate can take six months to several years to complete, depending upon the complexity of the estate and the jurisdiction. Once the estate is probated, your estate is part of the public record.

A revocable living trust and the transfer of assets into the trust can accomplish everything a last will can. However, the distribution of assets at the time of death remains private, and the court is not involved. The distribution of assets takes place according to the instructions in the trust.

By comparison, irrevocable trusts are not easily revoked or changed. Most irrevocable trusts are used as a planning tool to transfer assets for the benefit of another person without making an outright gift or for purposes of Medicaid or estate tax planning. An Irrevocable Medicaid Asset Protection Trust allows individuals to protect their life savings and home from the cost of long-term care while allowing the trust’s creator to continue to live in their home and benefit from the income generated by assets transferred into the irrevocable trust.

The transfer of assets to a Medicaid Asset Protection trust starts a five-year penalty period for Nursing Home Medicaid and a two-and-a-half-year penalty period for Home Care Medicaid for applications filed after March 1, 2024. After the penalty (or “look back”) periods expire, the trust’s funds are protected and not considered countable assets for Medicaid. The grantor may not be a trustee of an irrevocable trust.

One could also use an irrevocable trust to transfer assets to benefit a loved one, friend, child, or grandchild. Assets are not controlled by the beneficiaries but can be used by the Trustee for the beneficiary’s health, education, maintenance, and support.

Trusts are used to reduce the size of the taxable estate, to plan for the well-being of loved ones, and to protect the individual and couple if long-term care is needed. Speak with an estate planning attorney about the best trust for your unique situation.

Reference: Westchester & Fairfield County Business Journals (Jan. 26, 2023) “Which is Best for Me: A Revocable or Irrevocable Trust?” https://westfaironline.com/elder-law/which-is-best-for-me-a-revocable-or-irrevocable-trust/