Comparing Revocable and Irrevocable Trusts
When thinking about what documents you should include as part of your estate plan, trusts often come to the forefront of the conversation. Do I need a trust? If so, what kind? The truth is that there are many kinds of trust, each with different benefits. For simplicity, we can separate trusts into two different classes, to wit: revocable and irrevocable.
Revocable trusts, like their name suggests, allow the creator of the trust total control over the assets they transfer to the trust. They can revoke the trust, change the terms, take things in and out. There is effectively no change in the way you can access the asset in a revocable trust except for the title. The main benefit revocable trusts offer is that they avoid having to probate a Will in order for your beneficiaries to receive their inheritance. If you pass away, without a trust, your Will must be submitted to Court with a petition signed by your nominated Executor and your family members must receive notice of the proceeding. For those that are leaving their estates to their family members, the probate process is not so cumbersome. However, for those that may be disinheriting a family member, probate can become a long and expensive process when relatives are fighting. Revocable trusts avoid this process because the Trustee is authorized to simply distribute the assets in your trust after the creator’s death without any court intervention.
Although executing a Revocable Trust can be extremely beneficial for the creator of the trust, unfortunately, one benefit which cannot be realized from the execution of a Revocable Trust is asset protection for Medicaid planning or tax savings. Because the grantor (creator) of a Revocable Trust maintains complete control over the assets in the trust during their lifetime, and in most cases, acts as trustee of their own trust, assets held in the trust are considered completely available to the grantor. Accordingly, these assets will also be considered completely available should the grantor need Medicaid to pay for long term care, or if the grantor is trying to remove assets from their estate for tax purposes. The good news is that the federal estate tax exemption for 2023 is $12.92 million per person, or $25.84 million per couple. This means, if you pass away with less than these assets, you will not have to worry about federal estate tax. Since the majority of folks do not have taxable estates, we will focus on Irrevocable Medicaid Qualifying Trusts.
The creation of an Irrevocable Medicaid Qualifying Trust allows you to place your home and any asset you wish to protect into a Trust to be managed by a third-party Trustee according to the provisions of your Trust. If you are the grantor of an Irrevocable Trust, neither you nor your spouse may function as the Trustee. Grantors commonly designate their children as Trustees. If the ownership of your residence is transferred to the Trust, you retain the right to live in the premises during your lifetime, yet the house could be sold if need be and replacement property could be purchased by the Trustee. You retain any property tax exemptions that you were entitled to prior to placing your residence into your Irrevocable Trust, including Senior Citizen and STAR. If you decide to sell your home, the trustee can do so on your behalf and the Trust would then hold the liquid funds resulting from the sale. Liquid funds, such as bank accounts, money market accounts, certificates of deposit, stocks, and bonds can also be transferred into your Irrevocable Trust. If your Irrevocable Trust holds title to such investments, you as the Grantor would continue to earn all the income from the investments but you would not be entitled to the principal. With respect to asset protection, once property, in the form of real estate or liquid assets, has been in your properly drafted Irrevocable Trust for a period of five (5) years, it is no longer considered an available resource in determining Medicaid eligibility for nursing home care.
Therefore, although you have not started the process of protecting your assets, there are other benefits which can be realized from the creation and funding of a Revocable trust. However, if asset protection is your goal, you should consult with an experienced Elder Law attorney to determine which course of action is best for your particular circumstance.
