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  >  New Jersey Long term care planning   >  Irrevocable vs. Revocable Trusts – Is One Better than the Other? (Part 2)

Irrevocable vs. Revocable Trusts – Is One Better than the Other? (Part 2)

                Last week I explained that the initial reaction to irrevocable trusts vs. revocable ones is generally negative.  People perceive there to be a loss of control or really a loss of the use of the funds transferred to irrevocable trusts.  But, is that really true?

                No, it isn’t because irrevocability is not synonymous with loss of control.  It all depends on the purpose and the terms of the trust.   If, for example, I want to transfer assets out of my name in order to reduce the value of my estate for estate tax purposes and I have sufficient other assets so that I won’t ever need the assets transferred to the trust, then an irrevocable trust would be drafted to accomplish the tax benefit.  I would never be able to get the assets back but that’s OK.  My purpose is to get the tax benefit and I’m not worried about using the assets for my own personal needs.

                On the other hand, the clients for whom we set up irrevocable trusts for long term care planning  very well may need to use the funds in those trusts.  They hope they won’t need to but we just can’t be sure.  They are concerned about running out of money, which could happen with the cost of care potentially reaching $150,000 per year or more.

                Government benefits such as the Medicaid or VA Aid and Attendance programs, are needs based, meaning you have to spend down all or almost all of your assets to qualify.  Once you qualify, however, the benefit may not cover everything you need.   If you have spent down your assets already, however, you won’t have the funds to cover what the government won’t cover.

                That’s where the irrevocable trust becomes essential.  It will help our clients qualify for government benefits without spending everything they have so that they can supplement what the government won’t cover with funds from the trust.

                Now we’re back to the issue of control and being able to use the funds.  The trust we use in these cases must be irrevocable to help us qualify for the government programs but, at the same time, we must have  a way to be able to draw on those funds to pay for the care our clients need that isn’t covered by those programs.  So you see, there is control.

                It’s all in the way the trust terms are written.  As I always explain to prospects who call and tell me they have an irrevocable trust but want me to reassure them that this trust is “protected for Medicaid”, irrevocable trusts come in many shapes and sizes.  Irrevocability just tells me that grantor can’t simply “tear it up” and take all the assets out of the trust him/herself.  It doesn’t tell me how the assets can be drawn out or for whose benefit.  The only way to know is for me to read it.

                In the case of long term care planning we absolutely want – and need –  the trust assets to be available and accessible should we need them for care.  That’s why when someone tells me they fear irrevocable trusts because they will lose control I smile and tell them to pull up a chair and let me explain why they should “love” irrevocable trusts and not fear them.