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.

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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.

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Living Trusts & Medicaid Nursing Home Rules


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