Planning Ahead: Irrevocable vs Revocable Trusts

Is a trust right for your situation? It’s a common question. Anyone starting to think ahead to their own—or a family member’s—potential long-term care journey may be wondering if they should look into setting up a trust.

J. Barry, an attorney and founder of Elder Law of Middle Tennessee, a Life Care Planning Law Firm in Lebanon, Tennessee, sees plenty of confusion on the issue. “There are dozens of different types of trusts and each one has its use,” says Barry, who worked as an engineer, airline pilot, and patent attorney before launching his Life Care Planning practice in 2010. "People think trusts are one-size-fits-all, but the reality is that trusts are a lot like clothing. Just as your clothing size depends on the dimensions of your body, the situation you’re in and the goals you have will determine what type of trust is right for you.”

If a person is planning ahead for incapacity in the future, a revocable trust might be the right move. In this type of trust, the provisions can be altered or canceled by the person who set up the trust, also known as the “grantor.” A revocable trust works for people who are managing their finances well. The person who created the trust retains control while deciding in advance how and when the trustee might take over later if needed. However, a revocable trust is not for someone who wants to protect assets from creditors, lawsuits, or a nursing home. “A revocable trust can achieve many goals and you can set it up in dozens of ways,” says Barry. “You can decide that you no longer want to manage your own bank accounts, investment accounts, property, or other assets, but you still want some flexibility and control. You can set it up for probate. The major advantage is that if you decide you no longer want the trust, you can dissolve it. You just have to be aware of the tradeoffs.”

Irrevocable trusts are a different animal. Often prescribed for people who need expensive long-term care, irrevocable trusts cannot be modified, amended or terminated by the grantor. Irrevocable trusts offer the most ironclad protections, keeping assets safe from creditors, scam artists, the nursing home, spendthrift heirs, people who can’t manage their money, and lawsuit judgments. The tradeoff is control.

Contrary to popular belief, irrevocable trusts aren’t just for the rich. “We see a lot of people with homes worth $100,000 or $200,000 and it makes sense for them to put that home into an irrevocable trust,” notes Barry. “Others don’t have enough money to pay for the nursing home, but they have too much money to qualify for Medicaid. An irrevocable trust or a Qualified Income Trust could help them, too.” 

Barry stresses the importance of working with professionals to determine whether revocable or irrevocable trusts should be part of your estate plan and, if so, how they should be deployed. “Trusts are very technical, the laws governing them vary by state, and IRS regulations add a layer of complication to the issue,” Barry advises. “If you’re tempted to download a trust form from the internet and draft it yourself, resist the temptation. Your best bet is to work with an elder law or estate planning attorney who has experience setting up both types of trusts. You—and your heirs—will be glad you did.”