Many people are familiar with revocable or living trusts, but few know
the benefits of an irrevocable trust. The first step is understanding
the differences between the two types of trusts.
A revocable (living) trust allows for a technical change of ownership (from
the individual name to the trust name), but does not alter the control
the individual has over the property. All assets held in the name of a
revocable trust are completely accessable by the grantor (person creating
and funding the trust). Just instead of being titled in the name of John
Dough, the assets are titled in the name of the trust (ex. John Dough
Living Trust). In this situation, John Dough can still withdraw funds,
sell property, and do everything with the assets that he could while they
were in his individual name. This type of trust is frequently used as
a means of avoiding probate. Rather than having property distributed under
the terms of a will at John Dough's death, the property remains in
the trust to be distributed according to the terms John dictated when
setting up the trust.
An irrevocable trust is one in which the grantor (person creating and funding
the trust) cannot access trust assets. The grantor places assets in the
trust and designates lifetime beneficiaries who are allowed to access
the trust property during his lifetime, as well as terms for distributing
property at his death. At first thought, this may sound counterintuitive,
as John loses the ability to utilize, sell, or in any way disturb trust
property. This, restriction, however, is what makes this trust useful
for Medicaid planning. Property that is held in a properly designed irrevocable
trust is not countable for Medicaid purposes. So although Medicaid requires
the applicant to have no more than $2000 in assets in order to qualify,
the applicant can have unlimited property in the irrevocable trust because
that property is deemed not to belong to him.
There are numerous rules that must be followed when designing an irrevocable
trust, and many factors to consider. Timing of the transfer of property
to the trust is extremely important. Executed properly, however, the irrevocable
trust is one of the best ways to protect and preserve assets in the event
that an application for long-term care Medicaid becomes necessary.