Irrevocable Trusts

“I want to put my assets into an irrevocable trust to shield them from creditors.”

“I was speaking with my friend/neighbor/attorney and they recommended I set up an irrevocable trust so I can qualify for Medicaid.”

“I saw something on social media about how irrevocable trusts will protect my estate from the government.”

We hear these statements — or ones very much like them — all the time at Hudock Capital. Irrevocable trusts are a popular estate planning tool for high net-worth investors, because they can be used in all sorts of creative and interesting ways.

But all tools can be misused. (After all, you’d never use a screwdriver to hammer in a nail.) So, whenever we hear a statement like this, our response is usually the same:

“Why?”

As powerful as irrevocable trusts can be, they are not right for everybody. In fact, they are sometimes just plain wrong!

To understand why, and to get a clearer of whether an irrevocable trust is something you should consider or not, let’s first breakdown what an irrevocable trust is and why people tend to use it.

A trust, of course, is a legal agreement in which the owner of property or other assets (the grantor) transfers control of those assets to another party (a trustee) for the future benefit of a third person (the beneficiary). A trust created by the grantor during their lifetime is called a living trust.

Generally speaking, there are two types of trusts: Revocable and irrevocable. A revocable trust can be changed as many times as the creator wants or even canceled outright. This is handy if you want to reclaim property held in the trust, add or remove beneficiaries, or simply amend the terms of the trust.

An irrevocable trust, on the other hand, cannot be changed or canceled except by court order. Once created, the trust — and the assets inside — are simply no longer yours to control.

So, why would someone choose an irrevocable trust? Or, to put it another way, “Why does my attorney/friend/neighbor/advisor think I need one?”

Well, irrevocable trusts can be used for several purposes that don’t apply to revocable trusts. Here are a few of the most common:

To Avoid the Estate Tax. By putting some of your taxable assets into an irrevocable trust, you essentially remove them from your estate. As a result, you can reduce your tax liability and avoid triggering the estate tax on your heirs after you pass away.
To Protect Assets from Creditors. The assets in an irrevocable trust are generally shielded from creditors or lawsuits, while those in a revocable trust may not be.
To Qualify for Medicaid. Medicaid, unlike Medicare, can be used to help pay for nursing home care. But unlike Medicare, Medicaid is not available to everyone 65 or older — it’s reserved for those below a certain level of income. For this reason, some people choose to put their assets in an irrevocable trust in order to lower their income and qualify for Medicaid. (In this case, an irrevocable trust is known as a Medicaid Asset Protect Trust, or MAPT.)

These certainly sound like compelling reasons, don’t they? And in some cases, for some people, they are. But here’s the issue: Too often, too many investors hear the words, “You should put your assets into an irrevocable trust to avoid estate taxes” or “qualify for Medicaid” and rush to do exactly that.

But when it comes to estate planning, there are few cut-and-dried solutions. Proper planning involves diving a little deeper…and when we do that here at Hudock Capital Group, we usually find that what seems to make sense on the surface really doesn’t make sense at all.

Here’s one way to think of it. Imagine you were shopping for a new vehicle, but you didn’t know anything about cars. The salesperson says, “You have to buy a 4×4. With four-wheel drive, you can take your car off road. Other cars can’t do that.” Or “4x4s are just objectively better. With four-wheel drive, you’ll have better traction in the winter.”

Sounds great, right? Put like that, it sounds like a no brainer to buy a car with four-wheel drive.

But as you know, choosing a car isn’t as simple as that. Sure, off-road capabilities and better handling are undeniable benefits. But do they outweigh the downsides? Most importantly, are they the right benefits for you? For example, maybe you don’t need a car that can go off-roading — you need one that has great gas mileage instead. Maybe cargo space is what you need most, or a third row of seats. Maybe you don’t want to deal with the extra maintenance that a 4×4 often requires…or you are simply looking for something inexpensive and economical. In any of these scenarios, it’s not that the 4×4 is bad. It just doesn’t make sense for you.

Now, apply this same kind of thinking to the idea of an irrevocable trust — the financial 4×4.

I mentioned at the beginning of this article that whenever someone brings up the idea of putting assets into an irrevocable trust, I always ask them, “Why?” It’s the first step to digging a little deeper, and when we do that, here’s what we often find:

The grantor wants to avoid estate taxes…but when we look at the total value of their estate, we see that estate taxes simply aren’t an issue for them. The Federal estate tax exemption for 2025 is $13.9 million, meaning anyone whose estate is valued less than this is exempt from paying the tax. That means estate taxes are only an issue for about 0.14% of Americans.
The grantor wants to transfer assets to an irrevocable trust…except most of their assets are in an IRA. IRA participants cannot transfer ownership of a retirement plan to a trust without taking distributions. Which means they would need to liquidate their account, which may come with major tax implications and affect their retirement lifestyle.
The grantor wants to shelter assets from assisted living facilities or qualify for Medicaid…but transferring assets to an irrevocable trust may actually prevent them from qualifying for Medicaid at least five years. That’s because it triggers a five-year “look back” period, where the government calculates your total assets over the previous five years to determine if you fall under the required income threshold or not.
The grantor wants to ensure their loved ones avoid probate after they pass away…but when we look at their financial situation, we see they need as much liquidity as they can get in retirement and can’t afford to give up control of their assets forever. (Besides, when it comes to avoiding probate, a revocable trust works just as well, because it automatically becomes irrevocable after the grantor passes away.)

You see, more often than not, while an irrevocable trust can come with certain benefits, it’s simply not the best option for many people. It’s like buying a 4×4 — definitely right for somebody, but certainly not right for everybody.

At some point in your life, you will probably get a recommendation to set up an irrevocable trust. It could come from your attorney, or your coworker, or a friend. If and when that happens, it’s important that you do not rush into the decision blindly. Deciding whether an irrevocable trust is right for you should be a step-by-step process. Better still, it should be made as part of a comprehensive estate plan that covers:

Your long-term goals
Your current financial situation and future income needs
Your last will and testament
Your beneficiary choices
Your taxes, now and in the future
Your health

If you have any questions about whether an irrevocable trust is right for you, or if you need any assistance with your overall estate plan, please give us a call. We are always happy to help in any way we can!

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