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What Is an Irrevocable Trust?
Trusts are often vital components of estate plans. Different types of trusts play varying roles, depending on the size and complexity of the estate. In general, they help families avoid probate court, as anything in a trust is not subject to probate.
There are revocable trusts and irrevocable trusts. A revocable trust is used by an estate owner to move assets, so the trust owns the assets, not the person with the estate. However, if the estate owner wants to make changes to the trust at a later date or cancel it altogether, they can do so while they’re still alive.
An irrevocable trust becomes permanent as soon as it’s finalized and can’t be changed or canceled. That means the estate’s owner no longer has control of those assets–they belong to and are controlled by the trust and the trustee appointed to manage them.
That may sound daunting, and it’s definitely worth taking some time to determine if relinquishing control of the trust is worth the risk.
Discussing the specifics of your estate with an experienced estate planning and trust attorney is crucial to understanding what’s at stake for you.
However, one area in particular can make an irrevocable trust valuable: allowing beneficiaries to receive assets and still be eligible for certain government benefits, including Medicaid.
How Does an Irrevocable Trust Protect Assets While Allowing Access to Medicaid?
Medicaid is a government insurance program that allows users to have benefits not available from other types of insurance, including Medicare. Those users are primarily elderly people who need help paying for assisted living or nursing home care or younger people who are unable to work due to permanent disability or illness and need regular care.
Because it’s meant for people with limited finances, Medicaid has strict eligibility requirements that focus on each person’s resources and assets. Without estate planning, someone would have to use their financial assets and spend them down to very little (including selling real estate or other valuable items) to qualify.
But when someone sets up an irrevocable trust (often called an asset protection trust), they legally transfer those assets to another owner. They no longer own them and won’t be considered when filing for Medicaid.
It’s vital to understand that this can’t be a last-minute maneuver. Federal law says the trust must be finalized and assets transferred at least five years before the previous owner can file for Medicaid. So, if someone with considerable financial resources is unexpectedly injured and wants to file for Medicaid but hasn’t yet created an irrevocable trust, they won’t be eligible for Medicaid. They can choose either to spend down the assets or create the trust, knowing they’ll still have to wait at least five years to apply for Medicaid.
This is a complicated part of estate planning and not something someone should undertake on their own. It’s highly advisable to work with an experienced estate planning attorney who understands the nuances of irrevocable trusts and Medicaid.
What Are Other Pros and Cons of Using Irrevocable Trusts?
Besides providing a mechanism to protect future Medicaid applications, irrevocable trusts have additional pros and cons.
Pros:
- Protection against creditors. Assets placed in an irrevocable trust can’t be accessed by creditors. That includes legal maneuvers, such as when someone is sued and the suing party wants to take their assets. If those assets are in an irrevocable trust, it’s likely they can’t get them, making this an attractive trust for people in careers subject to lawsuits, such as doctors.
- Potential tax savings. Irrevocable trusts have the potential to reduce estate taxes. For specifics about your estate and future estate taxes, talk to an experienced estate planning attorney.
Cons:
- No changes. An irrevocable trust can’t be changed. If the person who authorized the irrevocable trust changes their mind about something (for example, wants to remove one of the beneficiaries), they can’t.
- No control. Unlike a revocable trust in which the estate’s owner still controls the assets and may even take the role of trustee, once the irrevocable trust is finalized, they lose all authority for the assets in the trust. They’re also not allowed to become the trustee of that trust.
What Is Connecticut’s New Irrevocable Trust Decanting Statute?
Connecticut lawmakers passed a statute that goes into effect on January 1, 2025, allowing some older trusts to be passed into a newer trust, similar to when an aged bottle of wine is decanted into another vessel. This means that in some cases, an irrevocable trust may be changed by the trustee into a new trust with different specifications. The nuances of this new statute are still being studied. If the original trust gave significant authority to the trustee, they’d likely have more latitude in creating the new trust than if they had a limited role. Contact an estate planning attorney if you have an irrevocable trust and wonder if it’s eligible.
What Should I Do if I Need Assistance with Estate and Medicaid Planning?
Call the Law Offices of Ericson, Scalise & Mangan as soon as possible at 860-854-3809 to request a consultation. Planning an estate can be complex, especially when factoring in protecting assets while retaining access to Medicaid. Our team of experienced, knowledgeable estate planning attorneys can review your estate details and help you determine if an irrevocable trust would benefit you.
