In the United States, there are various types of trusts you can create, all of which are either revocable or irrevocable. In comparison to revocable trusts, an irrevocable living trust is much more effective for eliminating your estate tax burden, in avoiding delays of asset distributions in probate courts and for Medicaid planning. However, an irrevocable trust only provides these benefits if you relinquish control over your assets.
Irrevocable vs. Revocable
As the names imply, revocable trusts allow you to change your mind and alter the terms of the trust, or even cancel it, at any time. In contrast, the transfer of assets to an irrevocable trust is permanent and irreversible. The terms of an irrevocable trust can only be modified by a state court that has jurisdiction over the trust. Both types of trusts can be “living trusts,” which simply implies that you create the trust during your lifetime rather than having the trust take effect at the time of your death. The main distinction between a revocable and irrevocable trust is that in the revocable trust, state laws continue to treat you as the owner of property.
Estate Tax Implications
Irrevocable trusts are a useful tool in estate planning when a main objective of creating the trust is to minimize the estate tax liability on the value of all assets. The federal estate tax rules only impose a tax if you own the assets at the time of your death. Therefore, by transferring your assets to an irrevocable living trust, the value of those assets are not subject to the estate tax, since you no longer have an ownership interest once the asset transfer is complete. Revocable trusts don’t provide estate tax savings due to your continuous ownership of the trust assets.
All trusts, including irrevocable living trusts, bypass probate -- court oversight of the distribution of your assets at death -- since state probate courts don’t have jurisdiction over trust assets as they do with property left in a will. When you create an irrevocable living trust, it’s no longer necessary to draft a will to provide instructions on which beneficiaries will receive your estate. This means that family members who are dissatisfied with the assets you leave to them in the trust cannot challenge your wishes in probate court. When you leave property in a will, however, these individuals can then challenge the terms of the will, thereby delaying the distribution of assets resulting from litigation.
One of the principal eligibility requirements to receiving Medicaid assistance is that you first deplete all of your assets to pay for your own medical expenses. Therefore, if you retain ownership of your assets, even if through a revocable living trust, at the time of submitting a Medicaid application, you will not receive federal assistance. Planning ahead with an irrevocable living trust can allow you to obtain Medicaid benefits without having to liquidate your assets since you no longer own those assets once they are in the trust. However, transferring assets into an irrevocable living trust is only one of many necessary components of Medicaid planning, and there are timing issues about which you may want to consult with a lawyer.
Read More: What Is an Irrevocable Medicaid Trust?
Jeff Franco's professional writing career began in 2010. With expertise in federal taxation, law and accounting, he has published articles in various online publications. Franco holds a Master of Business Administration in accounting and a Master of Science in taxation from Fordham University. He also holds a Juris Doctor from Brooklyn Law School.