Many people are familiar with revocable or living trusts, but few know the benefits of an irrevocable trust. The first step is understanding the differences between the two types of trusts.
A revocable (living) trust allows for a technical change of ownership (from the individual name to the trust name), but does not alter the control the individual has over the property. All assets held in the name of a revocable trust are completely accessable by the grantor (person creating and funding the trust). Just instead of being titled in the name of John Dough, the assets are titled in the name of the trust (ex. John Dough Living Trust). In this situation, John Dough can still withdraw funds, sell property, and do everything with the assets that he could while they were in his individual name. This type of trust is frequently used as a means of avoiding probate. Rather than having property distributed under the terms of a will at John Dough's death, the property remains in the trust to be distributed according to the terms John dictated when setting up the trust.
An irrevocable trust is one in which the grantor (person creating and funding the trust) cannot access trust assets. The grantor places assets in the trust and designates lifetime beneficiaries who are allowed to access the trust property during his lifetime, as well as terms for distributing property at his death. At first thought, this may sound counterintuitive, as John loses the ability to utilize, sell, or in any way disturb trust property. This, restriction, however, is what makes this trust useful for Medicaid planning. Property that is held in a properly designed irrevocable trust is not countable for Medicaid purposes. So although Medicaid requires the applicant to have no more than $2000 in assets in order to qualify, the applicant can have unlimited property in the irrevocable trust because that property is deemed not to belong to him.
There are numerous rules that must be followed when designing an irrevocable trust, and many factors to consider. Timing of the transfer of property to the trust is extremely important. Executed properly, however, the irrevocable trust is one of the best ways to protect and preserve assets in the event that an application for long-term care Medicaid becomes necessary.