Estate planning involves a lot of choices. Do you want to leave a will, or would you rather that your estate avoid the probate process? You can achieve the latter by creating a trust to distribute your assets when you die, but the choices don't stop there. There are many types of trusts. With an irrevocable trust, you transfer ownership of your assets into it, and you name a trustee to manage them for the rest of your life and after your death as well.
Many people shy away from the idea of creating an irrevocable trust because it means relinquishing ownership and control of the assets they've worked hard for all their lives. When you create an irrevocable trust, you literally give away everything you place into it, and you don't have the option of taking it back if you change your mind. However, you can still control what happens to the property going forward by writing provisions into your trust documents. Your trust documents control what your trustee does with the assets. You can state that certain heirs cannot receive windfalls at your death, but rather periodic payments, or that they should not inherit until they reach a certain age.
If any of the assets you place in your irrevocable trust produce income, you don't necessarily have to lose that. You can draft your trust documents so that the trust pays that income to you. If creditors or vulnerability to civil judgments are concerns for you, this income -- and any assets that you don't transfer into the trust -- is vulnerable to loss in a lawsuit. Although the law varies among states, in most circumstances creditors and civil judgments can't reach the assets in your irrevocable trust. By the same token, neither can you.
One of the greatest advantages to giving ownership of your assets to an irrevocable trust is that they pass out of your estate. This isn't the case with a revocable type of trust, one in which you can still access the assets, make changes to the terms of the trust documents, or even dissolve the trust if you see fit. Assets in a revocable trust are still part of your estate and are subject to estate taxes when you die. Assets in an irrevocable trust are not. There is one drawback concerning life insurance, however. If you create and transfer a life insurance policy into your trust, it's with the assumption that you'll live at least three more years. If you don't, the proceeds revert to your estate at your death, and they're taxable.
If you place your assets in a revocable trust, then suffer a serious health problem that requires a nursing home, federal Medicaid laws require that you take them back into your own ownership again, and use them to pay for your care. This isn't the case with an irrevocable trust. The very nature of the trust prevents you from taking the assets back, so they can still pass safely and intact to your beneficiaries. However, you can't fund an irrevocable trust and apply for Medicaid right away. Medicaid has a five-year "look back" period, during which time you can't transfer ownership of your assets to anyone else, including an irrevocable trust. If you require long-term hospitalization before five years have passed from the time you create your trust, you'll be ineligible for Medicaid for a period of time, which is calculated using the value of the assets you gave away.