The Differences Between A Revocable & Irrevocable Trust
As background, all of our trusts, whether revocable or irrevocable trust, in one way or the other help to cover the following points, illustrated by the acronym MAPS. This stands for:
Manage your affairs in your old age or illness
Avoid probateProbate can refer to the process of settling the estate of a deceased person. Read More
Protect assets
Save taxes
A revocable trust does not do anything to protect assetsThis general term refers, logically, to protecting assets from claims against trust beneficiaries. Read More for you. (Your revocable trust can protect your heirs — but that’s another article Children’s Inheritance TrustA trust created after the death of the Grantor for the benefit and protection of the inheritor (or created to receive lifetime gifts and inheritance from the Grantor). Read More Advantages.)
To protect assetsThis general term refers, logically, to protecting assets from claims against trust beneficiaries. Read More for you, such as against spend down on nursing home care, you need to implement an irrevocable trust. You cannot take out what you put into an irrevocable trust. However, what you put into an irrevocable trust may be distributed to others, such as your heirs, who can use those assets to help you out, but that is not something written into the trust.
Many people consider the fact that they cannot take back assets from the trust for their own purposes without input from anyone else as a drawback. After all, one of everyone’s goals, in our experience, is that they have maximum control and flexibility. But control and flexibility sometimes are overshadowed by protection. For those people, the protection gained by the irrevocable trust outweighs the loss of control.
For example, inside an irrevocable trust, you can still live in your home, but you no longer own the home. And if you sell the home, the proceeds stay in the trust rather than being paid to you personally. You will also need to have someone as a trustee on the title to the home to achieve the most protection available.
Likewise, money or other assets inside an irrevocable trust are not available for you to spend. You would have to go through a distribution to the trust beneficiaries who will then use the assets for their purposes. You may or may not be on their list of purposes for the use of those funds, to be perfectly honest, even though you might hope they will help you out.
Note: We can design irrevocable trustsA trust that cannot be revoked by the Grantor. Irrevocable trusts are created to either save taxes or protect assets, or both. More in ways that are helpful to you for income tax purposes, estate tax purposes, and looking ahead to the tax impact on your heirs. Thus, just because the trust is irrevocable does not mean it is unfavorable to you, in many respects.
So how does the irrevocable trust help protect assetsThis general term refers, logically, to protecting assets from claims against trust beneficiaries. Read More that are put into it? And why is it important to decide on this at this time in the first place?
In order for the irrevocable trust to work, five years must pass between the time that you put the assets in the trust and the time that you want to apply for Medicaid to pay your bills in a nursing home. It is important in many cases to get this clock started. In other cases it is not as important because you have enough assets to carry yourself for five years, which you would have to spend down anyway. If you have to spend the assets anyway, then it does not matter that you start the five year clock today as long as you start it at some point.
Once the five-year clock has run out, the assets in the trust should not be required to be spent on your care. Thus you are saving some of your legacy to pass down. (You may recall that is why we call this form of irrevocable trust the Legacy Assets Savings Trust, or LAST Trust™.)
The Medicaid authorities are “happy” to pay your way in a nursing home but only at the point that you have no more than the maximum amounts allowed by law, either as an individual or as a married couple. As of 2018 those amounts are $2,000 for the individual applicant and about $123,600 for the spouse.
Now, that is not the story if we are trying to plan intelligently for one of you who may have to spend time in a nursing home. There are other financial techniques that can be applied in many cases in order to avoid spending down to these levels. There may even be other legal techniques that can be applied. But other things being equal, you would have to spend your assets down significantly before Medicaid would kick in to help pay your bills.
Finally, there are other things to consider before putting your home into an irrevocable trust. For some, there is little downside and getting the five-year clock started can be extremely important. For others, there would be little value added to their immediate situation, other than peace of mind. You can always reconsider not putting your home into an irrevocable trust. An additional consideration is the cost of adding an irrevocable trust. It has to be worth it to you to spend an additional $3,000 or so to do so.
Whether you form a revocable or an irrevocable trust, your choice is an important part of your future. Making the right decision will aid you and your family members in the years to come.
For more on preparing for the future, read our 10 Essentials for a Comprehensive Estate Plan.
