Irrevocable Trust

An Irrevocable Trust is a trust that can't be modified or terminated without the permission of the beneficiary. The grantor, having transferred assets into the trust, effectively removes all of his or her rights of ownership to the assets and the trust.

The main reason for setting up an irrevocable trust is for estate and tax considerations. The benefit of this type of trust for estate assets is that it removes all incidents of ownership, effectively removing the trust's assets from the grantor's taxable estate. The grantor is also relieved of the tax liability on the income generated by the assets. While the tax rules will vary between jurisdictions, in most cases, the grantor can't receive these benefits if he or she is the trustee of the trust.

The assets held in the trust can include, but are not limited to, a business, investment assets, cash and life insurance policies.


A. What is a Trust?

1. A Trust is a relationship in which the person who establishes the Trust, the "Settlor" (also called the "Grantor" or "Trustor"), transfers legal title to his or her assets to a "Trustee," who holds and manages the trust property for the benefit of one or more "Beneficiaries."

2. A Trust can serve many purposes.

a. A Trust can serve as a vehicle for saving estate taxes.

b. A Trust can hold your assets until the time you have determined is appropriate for their distribution. For example, parents may wish to withhold certain assets from their minor children until they reach a certain age.

c. A Trust can provide for sound financial management of the Settlor's assets for the benefit of a person who is unable or does not wish to manage them himself or herself.

d. A Trust can be used to minimize the expenses and delays of probate.

e. A Trust can be established to fund a charitable gift.

f. An Irrevocable Trust can be used for Medicaid planning.

B. How Is a Trust Established?

1. A Living Trust is established during the lifetime of the Settlor by conveying legal title to assets to a Trustee, usually pursuant to the provisions of a written agreement between the Settlor and the Trustee.

2. A Living Trust need not be funded with all or even most of the Settlor's assets. The Settlor can add to the Trust during his or her lifetime or pass remaining assets to the Trust through his or her Will at death.

C. The Trustee

1. What are the Duties of the Trustee?

a. The duties of the Trustee are determined by the terms of the Trust Agreement and by state law.

b. Generally, the Trustee must exercise reasonable care and skill in managing the trust assets, keep accounts and furnish information to the beneficiaries, keep the trust assets separate from his or her or anyone else property, make the trust productive, pay the income to the beneficiary and deal impartially with the beneficiaries when there are more than one.

2. Who May Serve as Trustee?

a. Any competent adult may serve as Trustee. A "corporate Trustee," such as the trust department of a bank, may also serve as Trustee.

b. The Settlor may appoint himself or herself as Trustee of most Living Trusts, even if the Settlor is one of the beneficiaries. However, for a Medicaid Irrevocable Trust, the Settlor cannot serve as the Trustee.

c. Typically, the Trust Agreement will provide for one or more "successor Trustees" to serve in the event of the death, incapacity or resignation of the first Trustee.

How an Irrevocable Trust is used in Medicaid Planning

One way to divest yourself of assets for Medicaid Planning is to gift or transfer assets to an Irrevocable Medicaid Trust. The five year penalty period will apply to this gift/transfer.

1. Benefits of Irrevocable Medicaid Trusts

a. Use of the trust helps avoid probate because the trust rather than the older person's will directs where the property is to go. The trustee of the trust will manage the older person's assets, and the trust may be kept in place after the death of the grantor to help manage the assets for the spouse or children. Perhaps most importantly, the trust avoids the drawbacks of transfers of assets to children.

b. The trust can be left in place if the grantor dies, to withhold outright inheritance of the assets to the children.

c. The trust can protect nonexempt assets from depletion for payment of nursing home care.

d. The Medicaid Trust can hold any type of asset. Income can be distributable to the Medicaid applicant, his or her spouse, or the children. Principal can never be distributable to the applicant or his or her spouse. Principal distributions, if allowed at all, can be made only to the children.

2. Drawbacks to Irrevocable Medicaid Trusts

a. The main drawback is that, in order to be a Medicaid Trust, the trust must be irrevocable. The grantor loses control over and access to the principal. Irrevocability only upon incompetency or entry into the nursing home would cause the corpus to be an available asset.

b. If the applicant is incompetent, a trust cannot be established. The only option in this case is to use a Durable Power of Attorney previously signed to transfer assets out of the applicant's name.

c. The cost, the set-up fee and the management fee can be significant and must be considered when evaluating whether such a trust is appropriate for a client. The target client will probably have assets of $100,000 to $1,000,000 to be protected for Medicaid purposes.

d. The use of a trust may cause Medicaid to scrutinize all transfers more closely. For example, transfer of a residence into a trust with the elderly person retaining the right to live in the house may cause the Department of Job and Family Services the agency (who manages the Medicaid program) to argue that the person has retained an interest in the home sufficient to disqualify him from Medicaid benefits. To remedy this possible outcome, the transfer of a residence into a Medicaid Trust may be accompanied by a formal written lease with actual lease payments at fair rental value if the grantor or spouse remain in the home.

e. The Internal Revenue Code complicates the drafting of these Trusts. Although the Department of Job and Family Services does not apply tax law when evaluating transfers (to a Trust or otherwise), the tax laws do apply to these trusts for purposes of income, estate and gift taxes. The income, estate and gift tax ramifications must be carefully evaluated and discussed with the client.