All trusts are not the same and there are many different types used for a variety of purposes. Two common types of trusts in estate planning are revocable trusts and irrevocable trusts.
Here's an overview:
An irrevocable trust is a trust set up for asset protection purposes. The trust can hold almost any type of asset, including your home, bank accounts, and investments. You cannot have access to the principal of the trust, but you retain the right to receive the income (dividends and interest), change the trustees, and change the beneficiaries. After five years have passed, the assets held in the trust are protected with respect to Medicaid. You would not have to spend those assets on the cost of care. Instead the assets are protected and will be inherited by your beneficiaries.
For many, their home is their largest asset and accordingly, the home is transferred to their irrevocable trust. Like a life estate, you will keep your real estate tax exemptions and deductions. If the house is sold during your life, you can still use your capital gains tax exclusions and the proceeds stay protected by keeping the cash/sale proceeds in the trust. The house also cannot be sold without your consent.
With the escalating cost of healthcare, it is more important than ever for seniors to protect from a sudden healthcare crisis the assets they worked their whole life to save. An irrevocable trust is an important tool in that asset protection plan.
A revocable trust is a trust where you, the trust creator, reserve the right to revoke or change the trust at any time. If properly structured and funded, the trust can be helpful in avoiding probate and allowing for the management of assets during incapacity. Most importantly though, a revocable trust offers no asset protection. For Medicaid purposes, all of the assets in a revocable trust are considered available and may have to be spent on the costs of care.
The better option for most seniors is to protect assets in an irrevocable trust. This type of trust cannot be revoked or changed by you alone, but can be revoked or changed with the consent of the trust beneficiaries. The benefit of making a trust irrevocable is that it can be structured as a Medicaid asset protection trust.