Revocable vs. Irrevocable Trusts

Krause Financial

Disclaimer: With Medicaid, VA, and insurance regulations frequently changing, past blog posts may not be presently accurate or relevant. Please contact our office for information on current planning strategies, tips, and how-to's.

Which kind of trust should your client be putting their assets into? If they plan to apply for Medicaid in the future, this question is extremely important. One trust, the revocable trust, will allow your client to change the trust even after they put assets in it, but all those assets will be counted in determining their Medicaid eligibility. The other trust, the irrevocable trust, will not be able to be changed once created but it will help protect their assets when applying for eligibility.

A trust is a great way to protect assets while also being able to specify who will be the beneficiary of those assets. Even after the trust owner passes away, he or she can still control the outcome or ownership of the assets. Some drawbacks to creating a trust for your client might be that the legal fees involved can cost thousands, there is additional paperwork required, and a new bank account will need to be opened up for the trust. However, the benefit of protecting assets outweighs these items.

A revocable trust is a contract that can be changed or revoked. This change can be made at any time by the creator of the trust. Due to the fact that the trust can be changed at any time, all the resources in the trust will be included in the gross estate for estate and gift tax purposes.

Similarly, if a Medicaid applicant has a revocable trust, all the resources in the trust will be counted and added to their total assets that factor into their eligibility. A home, a car, and other personal possessions may be excluded from factoring Medicaid eligibility, but you will want to look at your specific state’s regulations, so your client knows what will be excluded. However, if the home is deeded into the name of the revocable trust, then the home will be included in factoring eligibility. To make sure the home is not included, make sure your client deeds the home out of the trust name before applying.

An irrevocable trust cannot be changed or revoked and is useful when applying for Medicaid eligibility. The grantor of the trust will give up control of the resources once they are put in an irrevocable trust. The grantor, however, is able to say, in advance, how he or she would like the resources in the trust distributed or used.

If someone is able to plan out far enough ahead before they apply for Medicaid, they can transfer their assets into an irrevocable trust and wait out the five-year look-back period. After those five years, the entire trust will be ignored for Medicaid eligibility purposes.

Although similar in the look-back period, a trust is different than a gift for a number of reasons. One main reason being that when someone gives a cash or resource gift, they lose control of how that resource is used or spent. If that person creates a trust, they will continue to control how the resources in the trust are used or to whom the resources will go to.

If your client chooses a revocable trust, know if they would want to apply for Medicaid in the future and how that might affect their eligibility. If they choose an irrevocable trust, make sure they understand the lack of control they will have over those assets but also how the assets, depending on when they were put in the trust, may be shielded from Medicaid eligibility requirements. If your client already has a trust and is in need of crisis Medicaid planning, call our office to learn more about your client’s options to qualify for benefits.


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