Following on from our previous blog article on Friday, of our 5 Most Frequently Asked Questions, here is Question 2 and the answer.

Question #2: Which is better – A revocable trust or an irrevocable trust? 

With a trust, you are creating this new legal entity, and you are going to transfer ownership of some assets to be managed by the trust. The trustee of the trust is the person in control, while the beneficiaries of the trust are the people who get stuff out of the trust or those allowed to receive distributions. In a revocable trust, the creator of the trust is typically the trustee and the beneficiary, which means they’re in total control and they have total access. Once you’ve set up the trust, life goes back to normal and you use the money however you want to.

Many people are aware that probate can be time consuming and expensive. Putting your assets into a trust, means that when you pass away, the distribution of your stuff is governed by the terms of the trust. This supercedes the terms of the will. This means you can avoid the courthouse and the probate process. This is the primary reason why people use a revocable trust.

Types of Irrevocable Trusts

The types of irrevocable trusts available are used for tax planning, for special needs planning and charitable planning. There are also irrevocable trusts used for asset protection. The type of trust you use, depends on what you are trying to accomplish. 

The type of irrevocable trust I like to use, especially when it comes to middle class families, is an asset protection trust. The creator of the trust, or Grantor, will have some control of the trust. However, bear in mind that if you can access the money in your trust, the nursing home can access it too. The purpose of an asset protection trust is to protect assets from long term care costs, if you get sick. Nursing homes cost $150,000 a month which is costly for most people in the long term. Depending on your health care situation when you’re over 65 years of age, your treatment may be covered by Medicare. For example, the treatment for most types of cancer is acute. This is covered by Medicare and includes medication, hospitalization and surgery.

Medicare Won’t Pay

However, if you have Alzheimer’s disease, it’s unlikely you will need surgery or hospitalization. The treatment for dementia is often long term in a nursing home. Since Medicare doesn’t pay for that, people end up going broke paying for long term care. Only when they are broke are they eligible for Medicaid benefits to pay for their care. If I get sick in my 70’s with dementia, my wife may live another 15 or 20 years. I want to make sure she has a house to live in and some money in the bank. This is something we can plan for with an asset protection trust.

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