When it comes to estate planning, 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. Beck, Lenox & Stolzer Estate Planning and Elder Law, LLC, finds that more potential clients are understanding at least some of the differences between a revocable and irrevocable trust.
In a revocable living trust (RLT), the creator of the trust, known as the “grantor,” benefits from the trust and can be the sole Trustee. While living, the grantor/trustee has full control of the real estate property, bank accounts or investments placed in the trust. The grantor can also amend, modify and revoke the trust anytime he or she wants.
The goal of a revocable trust is mainly to avoid probate at death. Probate is the process of admitting a last will and testament in the court in the county where the decedent lived to have the will deemed legally valid. This is also when the court appoints the executor named in the last will. The executor then has access to the estate’s assets to pay bills and distribute funds to beneficiaries as named 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. In other words, nosy neighbors and interested family members can look up the contents of your estate. Probate can also be quite expensive, as court and attorney costs are typically based upon a percentage of the assets being probated.
A revocable living trust and the transfer of assets into the trust can accomplish everything a last will can. However, distribution of assets at the time of death remains private and the court is not involved. Distribution of assets takes place according to the instructions in the trust. A trust costs more to create than a will, however, if the asset value is high, you will save a large amount of money vs. what it would cost to probate a will.
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 is used to allow an individual 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 income generated by assets transferred into the irrevocable trust. As compared with revocable trusts, irrevocable trusts are not easily revoked or changed.
The grantor may not be a trustee of an irrevocable trust and 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 funds held by the trust are protected and are not considered countable assets for Medicaid.
An irrevocable trust can also be used to transfer assets for the benefit of 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 which trust is best for your unique situation. Beck, Lenox & Stolzer is particularly skilled in elder law and we help clients on a weekly basis with irrevocable trusts for Medicaid eligibility. We invite you to check out our website, and if you need an attorney you can trust to explain the differences between a revocable and irrevocable trust, take advantage of our free attorney phone consultation.
Reference: Westchester & Fairfield County Business Journals (Jan. 26, 2023) “Which is Best for Me: A Revocable or Irrevocable Trust?”