Revocable or Irrevocable Trust? Understanding Your Options

Estate planning involves important decisions about how to manage your assets and protect your legacy. One of the most versatile tools in estate planning is the trust. Trusts offer flexibility, control, and protection, but choosing between a revocable trust and an irrevocable trust is crucial to meeting your goals.

Here’s a detailed look at the differences between revocable and irrevocable trusts, their benefits, and when each might be appropriate.

What Is a Trust?

A trust is a legal arrangement where one party (the grantor) transfers assets to another party (the trustee) to manage for the benefit of a third party (the beneficiary). Trusts provide a structured way to manage, protect, and distribute assets during life and after death.

Two main types of trusts are revocable trusts and irrevocable trusts. Each serves distinct purposes depending on your financial situation and estate planning objectives.

Revocable Trusts: Flexibility and Control

A revocable trust, also known as a living trust, can be changed or terminated by the grantor at any time during their lifetime. This flexibility makes revocable trusts a popular choice for people who want control over their assets.

Key Features of a Revocable Trust

• • Flexibility: The grantor can modify or revoke the trust at any time.
  • Control: The grantor often serves as both the trustee and the beneficiary during their lifetime, maintaining control over the trust’s assets.
  • Avoidance of Probate: Assets in a revocable trust avoid probate, allowing for a smoother and faster distribution to heirs.
  • No Creditor Protection: Since the grantor retains control, assets in a revocable trust are accessible to creditors or in lawsuits.

When to Use a Revocable Trust

• • You want to maintain control of your assets during your lifetime.
  • Your primary goal is to avoid probate and ensure a seamless transfer of assets to beneficiaries.
  • Creditor protection and Medicaid eligibility are not immediate concerns.

Irrevocable Trusts: Protection and Security

An irrevocable trust cannot be modified or revoked after it is created (with rare exceptions). Once assets are placed into an irrevocable trust, they are no longer considered part of the grantor’s estate.

Key Features of an Irrevocable Trust

• • Asset Protection: Assets in the trust are shielded from creditors and lawsuits.
  • Medicaid Planning: Irrevocable trusts are often used to help meet Medicaid eligibility requirements by removing assets from the grantor’s ownership.
  • Tax Benefits: Assets in an irrevocable trust are not included in the grantor’s taxable estate, potentially reducing estate taxes.
  • No Control: The grantor relinquishes ownership and control of the assets to the trustee.

When to Use an Irrevocable Trust

• • You are planning for Medicaid eligibility or long-term care and want to protect assets from being spent down.
  • You have a high-net-worth estate and want to minimize estate taxes.
  • You need to protect assets from creditors or legal claims.

Revocable vs. Irrevocable Trusts: A Quick Comparison

Specific Considerations Under Minnesota Law

In Minnesota, trusts are governed by the Minnesota Trust Code (Minn. Stat. § 501C), which outlines requirements for creating, managing, and terminating trusts. Here are specific considerations relevant to Minnesota residents:

• Medicaid Look-Back Period: For irrevocable trusts used in Medicaid planning, transfers must be made at least five years before applying for Medicaid to avoid penalties.
• Probate Avoidance: A revocable trust can help bypass Minnesota’s probate process, saving time and reducing costs for heirs.
• Tax Implications: Minnesota imposes estate taxes on estates exceeding $3 million. Irrevocable trusts can help reduce taxable estates.

Choosing the Right Trust for Your Estate Plan

The decision between a revocable or irrevocable trust depends on your goals, financial situation, and future needs. Consider these questions:

• Do you need flexibility and control over your assets? (Revocable trust)
• Are you looking for protection from creditors or Medicaid planning? (Irrevocable trust)
• Do you want to minimize estate taxes? (Irrevocable trust)

Next Steps: Work With an Experienced Estate Planning Attorney

Creating a trust is a significant decision that requires careful planning and legal expertise. At Johnson/Turner, we specialize in helping individuals and families in Minnesota create tailored estate plans that protect their assets and achieve their goals. Whether you’re considering a revocable or irrevocable trust, we’re here to guide you every step of the way.

Contact us today to schedule a consultation and start building your comprehensive estate plan.