revocable or irrevocable?

Trusts are excellent vehicles for probate avoidance, management of assets, ease of  disposition of funds to one’s beneficiaries upon death, asset protection planning and estate tax planning. That being said, it is often difficult to know what type of trust one needs! Here, we discuss the basic differences between Revocable and Irrevocable Trusts.

With a Revocable Living Trust (RLT), the Trust Creator(s) (also known as a “Grantor(s)”) creates a trust for their benefit where they can also be the sole trustee. During the creator’s lifetime, he/she has full control over the real property, bank accounts, investments and any other assets that have been titled in the name of the RLT, along with the power to amend, modify and/or revoke the RLT.

The most significant advantage of an RLT is that it avoids the need for probate with respect to the assets titled to the RLT upon the creator’s death. Probate is the process of admitting one’s Last Will and Testament in the Surrogate’s Court in the county where the decedent resided, for it to be deemed legally valid after one’s passing in order to allow the executor access to assets titled to the decedent’s name alone and to allow the executor to pay bills and distribute the funds to the beneficiaries named in the Will. The probate process can take about nine months to over a year to complete. There are also filing fees to be paid to the court, legal fees to attorneys and the estate is then a matter of public record.

A RLT and the diligent transfer of one’s assets (non-IRA/non-retirement) to said trust, can accomplish everything a Last Will and Testament can, while avoiding the expenses, difficulties and delays associated with probate. IRAs, 401Ks, annuities and life insurance should all have named beneficiaries and alternate beneficiaries so as to avoid probate. Additionally, any estate tax planning that can be done in one’s Last Will and Testament can be done in a RLT.

In comparison, Irrevocable Trusts are cannot be amended and/or revoked. There are a number of types of Irrevocable Trusts, but most commonly they are used as a planning tool to transfer assets for the benefit of another without making an outright gift to that individual, or for purposes of Medicaid Planning and/or Estate Tax Planning. An Irrevocable Medicaid Asset Protection Trust (MAPT) allows an individual to protect one’s life (non-retirement) savings and home from the cost of long-term care, while granting the trust creator the right to continue to reside in their home and still benefit from the income generated by the assets transferred to the Irrevocable Trust. The trust creator cannot be the trustee of the trust. Typically, one’s children and/or loved ones are named as trustees. The transfer of assets to a MAPT creates a five-year penalty period for Nursing Home Medicaid and, as of the time of this writing, would create a two-and-a-half year penalty period for Home Care Medicaid for applications filed after March 31, 2024. After the penalty period runs, the funds held by the trust are protected and no longer countable assets for Medicaid eligibility purposes and Medicaid can no longer have a claim or lien on said assets.

Additionally, an Irrevocable Trust can be used to transfer assets for the benefit of a loved one, friend, child and/or grandchild so that the assets are not controlled by the trust’s beneficiary, but can be used by the trustee of the trust for the beneficiary’s health, education, maintenance and support. This is an excellent tool often used to lower one’s taxable estate and provide for the education and future needs of a grandchild and/or child.

As you can see, there are a number of excellent reasons to consider a Revocable and/or Irrevocable Trust!

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