Advantages of an Irrevocable Trust

By Beverly Bird

If you’re like most people, you’ll need a really good reason to give up control over the hard-won assets you’ve accumulated during your lifetime. For some individuals, the benefits of an irrevocable trust balance the fact that using one requires relinquishing ownership and control of what they've worked for and earned. The major difference between a revocable trust and an irrevocable trust is that with the latter, its creator names another individual to manage it for him, ceding all rights to do so himself.

Protection of Assets

When you place your assets in a revocable trust, you still own them. You’re the trustee during your lifetime, so the trust is a legal extension of you. If someone sues you and receives a large monetary judgment against you, the assets in your revocable trust are vulnerable to satisfy that debt because they’re still yours. An irrevocable trust protects them because the trust is a separate entity from you. Because your trust did not commit whatever act spurred the lawsuit, it cannot be liable for damages. Your gifts to your heirs remain intact, even if someone sues you and wins.

Avoiding Taxation

Because you no longer own the assets you place in your irrevocable trust, their value is not taxable to your estate when you die. However, one exception exists. If you transfer ownership of your life insurance policy to your trust and die within three years of doing so, the Internal Revenue Service treats the transfer as though it never happened. The policy’s death benefit is included in your estate. You can usually avoid this by having your trust purchase a policy, rather than transfer a policy into it. You can still fund the premiums by making payments to the trust monthly to cover the cost.

Protect your loved ones. Start My Estate Plan

Avoiding Probate

Assets contained in your irrevocable trust bypass the probate process when you die. The extent of your holdings does not become a matter of public record, as it would if you bequeathed your assets in a last will and testament. A revocable trust shares this benefit, even though its creator maintains control over the assets held in it.

Medicare Considerations

Some individuals find themselves having to “spend down” or give away their assets if they must enter a nursing home. They must essentially get rid of what they own so they can qualify for Medicare to fund long-term care. Medicare will continue to pay for that care after assets run out. Placing assets in a revocable trust doesn't help; a long-term care facility can force patients to tap into those assets for payment. An irrevocable trust keeps assets intact, earning interest that accumulates in the trust. Such trusts can also include "spendthrift" language to guard against heirs squandering them, an advantage lost when assets are given away. Complex rules apply to Medicare, however. If long-term care is a concern for you, speak with an attorney or financial adviser to make sure an irrevocable trust is the right option for you.

Cash Flow

Although you give up ownership of your assets when you place them in an irrevocable trust, you don’t necessarily have to give up the income they produce. A properly crafted trust can usually retain ownership of your investments and make payments to you for any interest they generate.

Protect your loved ones. Start My Estate Plan
Living Trusts & Medicaid Nursing Home Rules


Related articles

What Items Should Be Put Into a Living Trust?

A living trust is created during a person's lifetime and comes in two types: revocable and irrevocable. A revocable trust allows you to freely transfer your property in and out of the trust. By contrast, the maker of an irrevocable trust cannot serve as trustee or exercise control over the trust's assets, so irrevocable trusts are less flexible than revocable trusts. Many people fund their revocable trusts with their most valuable assets, which usually include the family home, bank accounts and investments.

Guidelines for Using a Pour-Over Will in a Living Trust

Few things in law are exactly what they sound like, but a pour-over will is one. When you die, it essentially "pours" some of your assets into another estate-planning mechanism for distribution to your beneficiaries. Pour-over wills generally work in tandem with trusts. They address assets that -- for one reason or another -- you did not transfer to your trust.

How to Shelter Assets from Nursing Home Care Costs

Nursing homes provide a valuable service for elderly and disabled individuals who cannot adequately care for themselves. The cost of this care can be steep, however. The American Association of Retired Persons reports that the typical nursing home stay costs an average of $50,000 a year. Many elderly individuals mistakenly believe that Medicare will cover their nursing home stay. Unfortunately, Medicare is not structured to pay for long-term care. Medicaid, a federal insurance program for low-income individuals, will cover nursing home care, but you may not be able to qualify for that care until you have exhausted your existing assets. Unfortunately, this leaves you without the financial security you previously enjoyed if you decide to return home. It also absorbs money you might prefer that your loved ones inherit after you pass away. While hiding assets from the government is a criminal offense, you can legally shelter certain assets and avoid using them to pay for the high cost of a nursing home stay.

LegalZoom. Legal help is here. Start Here. Wills. Trusts. Attorney help. Wills & Trusts

Related articles

Are Living Trusts Exempt From Lawsuits?

Trusts can provide many advantages for asset protection, as well as easing the transfer of property from one generation ...

What Is a Descendant's Trust?

When you create a trust, you place your assets in it during your lifetime, transferring ownership into the name of the ...

How Does a Living Trust Avoid Nursing Home Costs?

It’s a myth that all living trusts avoid nursing home costs. Different kinds of trusts exist and some offer no ...

Can Creditors Get Property Put in Trust Before a Bankruptcy?

The law is full of questions that have both yes and no answers, particularly when it comes to bankruptcy and trusts. ...

Browse by category
Ready to Begin? GET STARTED