There are various reasons for using a revocable or an irrevocable trust. Some use a revocable trust for asset management during their lifetime. Others use a revocable trust to pass assets to their beneficiaries upon death with some measure of control over those assets.
Irrevocable trusts can be used to protect assets from long-term care expenses. One way to protect assets from long-term care costs is to not own the assets. As opposed to using a trust, assets could be transferred outright to an individual’s child, for example; however, those assets would be subject to the child’s life. For instance, assets transferred outright to a child would be subject to the child’s death, divorce, disability, and creditors. The assets in the irrevocable trust are not owned by the beneficiaries; therefore, are not subject to the beneficiaries’ life events.
It is important to know that assets owned by a revocable trust are not protected from long-term care expenses. Following are some characteristics of revocable and irrevocable trusts:
|
Revocable Trust |
Irrevocable Trust Established To Protect Assets From Long-Term Care Costs | |
|---|---|---|
|
Grantor has power to revoke the trust. |
Yes |
No |
|
Grantor has the right to income. |
Yes |
Yes or No Income can be paid to the grantor or can accumulate in the trust. Grantor decides this at the time the trust is established. |
|
Grantor has the right to change the beneficiary. |
Yes |
Yes, if the grantor retains this right when the trust is established. |
|
Grantor can also be the trustee. |
Yes |
Yes |
|
Grantor has access to principal. |
Yes |
No, but the grantor can give someone else access to principal. |
|
Revocable Trust |
Irrevocable Trust Established To Protect Assets From Long-Term Care Costs |
|
|
Assets in the trust are protected from long-term care costs. |
No |
Yes |
|
Assets avoid probate in PA. |
Yes |
Yes |
|
Assets avoid PA inheritance tax and federal estate tax. |
No |
No, if the grantor retains certain rights, such as the right to income or the power to change the beneficiary. |
|
Income is taxable to the grantor. |
Yes |
Yes, if the grantor retains certain rights, such as the right to income or the power to change the beneficiary. |
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