The Benefits of an Irrevocable Trust

Q: I had an irrevocable trust drawn up for me years ago. What are its benefits, and do I need to update it?

A: There are many types of irrevocable trusts, but by far the most common is the Medicaid Asset Protection Trust. The main benefit of the trust is protecting assets for purposes of qualifying for Medicaid Long term care. The cost of homecare or nursing home care, is not covered by the everyday health insurance. Should one need long-term care, they must either pay privately, have long term care insurance, or qualify for Medicaid. Medicare does not pat for long term care.

Qualifying for Medicaid requires meeting Medicaid’s asset and income limits. By transferring assets to an irrevocable trust, one can reduce their available assets for Medicaid eligibility. Assets held in the trust for five years are fully protected under the five-year look-back period for nursing home Medicaid. There is currently no look-back period in New York for homecare Medicaid. Therefore, assets transferred to the trust are unavailable for homecare Medicaid as of the date of the transfer.

The Medicaid Asset Protection Trust allows the Grantor (creator of the trust) to receive income from the trust (rental income, interest, dividends, etc.). However under no circumstances can the Grantor, or the Grantor’s spouse, have access to the trust principal. The Grantor or their spouse cannot be Trustee. The Grantor still maintains an impressive level of control. The Grantor retains the right to reside in any home held in the trust, remove or replace a Trustee, and change the beneficiaries. If a home held in the trust is sold, the proceeds from the sale can be used to purchase a substitute property for the Grantor.

Another advantage of an irrevocable trust is that assets placed in the trust avoid probate. Probate is the process in which a Last Will and Testament is filed in Surrogate’s Court in the county where the decedent resided at the time of death. The named Executor will have to file the original Will and death certificate, along with a probate petition with the court. The decedent’s next-of-kin will have to be notified and provided the opportunity to contest the validity of the Will. Only after the court issues a decree granting probate and issues Letters Testamentary can the Executor then marshal the decedent’s assets and distribute the property according to the terms of the Will. The probate process can be significantly time-consuming and costly. Assets held in your sole name without a listed beneficiary must pass through the probate process. However, assets held in a trust will pass seamlessly upon the Grantor’s death without court intervention.

Because the trust is irrevocable, there are limits on the ways it can be updated as time passes. As mentioned, this type of irrevocable trust can give the Grantor the power to remove/replace a trustee and change the ultimate beneficiaries of the trust. Most other types of irrevocable trusts do not have this flexibility. It is important to meet with an Estate Planning and Elder Attorney to review your current trust, and determine if it meets your needs and goals. An attorney can usually work with you to make changes even when a trust is irrevocable.

Michal Lipshitz, Esq. is an attorney at Burner Law Group,