Irrevocable Trusts FAQs

The general answer is no, but there are some exceptions to the rule. A trust agreement can allow for the appointment of a neutral trust protector to make an objective decision about a proposed change. A beneficiary or trustee can be given a power of appointment that would give them the ability to make changes under certain circumstances. Charitable trusts will often include provisions that allow for modifications to adapt to changes to relevant tax laws.

One very common reason to use this type of trust would be to position your assets with future Medicaid eligibility in mind. This need-based government health insurance program is relevant to people that will qualify for Medicare because it will pay for stay in a nursing home.

If you convey resources into an irrevocable trust, you could continue to receive income that is earned by the assets until and unless you apply for Medicaid. The principal would not count, but you must fund the trust at least five years before you apply for Medicaid coverage.

In addition to the nursing home asset protection strategy, an irrevocable trust can be used to provide for a person with special needs. Many people with disabilities rely on Medicaid and Supplemental Security Income, and a windfall can cause a loss of eligibility.

You would not want to leave a direct inheritance to someone that is in this position, but you could fund an irrevocable supplemental needs trust as an alternative. The trustee would be able to use assets in the trust to make the beneficiary more comfortable without impacting benefit eligibility.

A first party or self-settled supplemental needs trust can be established by a person with a disability if they come into money. However, Medicaid would be able to attach the remainder after the death of the beneficiary.

When the funding is coming from someone other than the beneficiary, it would be a third party trust, and a successor beneficiary would inherit the remainder. Medicaid would not be able to reach assets that remain in the trust after the death of the first beneficiary.

These are a couple of the most common reasons why irrevocable trusts are used, but there are other utilizations.

Assets that you convey into an irrevocable trust would be removed from your estate for transfer tax purposes, so they are used to gain tax efficiency. However, people that are not multimillionaires use these trusts to satisfy other objectives.

If you use a simple will to state your final wishes with regard to asset transfers, it would be admitted to probate. This is a costly and time-consuming legal process that strips your family of privacy.

You would be allowing for the distribution of lump-sum inheritances, so there would be no asset protection or spendthrift protections, and this is another drawback.

If you use a revocable living trust instead of a will as your asset transfer vehicle, the distributions would not be subject to probate.

Plus, you could include a spendthrift clause which would protect the assets from the beneficiary’s creditors. You could also instruct the trustee to distribute limited assets over an extended period of time.

This is a logical assumption, but in fact, you can create a revocable living trust. You would not surrender incidents of ownership, because you could act as the trustee and you could in fact revoke the trust.