revocable vs. irrevocable trusts

The key distinction between revocable and irrevocable trusts has to do with the amount of control the donor (person who creates and funds the trust) retains over her assets. With a revocable trust, the donor typically retains the right to revoke or amend the trust at any time and for any reason. Accordingly, the donor can take advantage of all of the benefits and uses of a trust (asset protection, probate avoidance, etc.) while maintaining complete control over the assets. In a typical revocable trusts, the donor (or the donor and the donor’s spouse) is the initial trustee. So all the donor has done to obtain the benefits of a trust is change the legal description of the donor’s ownership interest in the property. Although, the specific provisions and goals vary greatly from trust to trust, most people choose revocable trusts to ensure that the trust assets are managed for the benefit of themselves and their families during their lives. A revocable trust may also include special language designed to address the donor’s estate tax exposure, if applicable, and any special planning considerations.

With an irrevocable trust, the donor gives up control over the trust assets in order to achieve a particular planning objective. Irrevocable trusts are often used to create Medicaid eligibility. Medicaid, commonly known as Masshealth, is a needs-based federal program administered by the state. The program is designed to provide health care only to those individuals whose assets fall below certain, very low, thresholds. However, while assets can disqualify a person from being eligible for Medicaid benefits, income cannot. The donor gives up all control over the property transferred to the trust, including the right to access the principal of the trust, but, in most cases, retains the right to the income produced by the assets of the trust.