A trust is a legal instrument that holds your assets and manages / distributes them according to your set of instructions.

You sign a set of instructions on how you want your money to be managed (the trust.) You appoint a trustee to carry out your wishes written in the trust. You can appoint yourself as trustee for the remainder of your life, then a back up trustee to take over when you die.

There are two types of trusts, revocable and irrevocable.

A revocable trust is one that you can undo at any time during your life. People get these trusts mainly to avoid probate and to keep their financial affairs private – if you don’t have a trust your assets go through probate, a public forum where people can look you up.

An irrevocable trust is one that you cannot undo. It’s main purpose is asset protection.

Assets in an irrevocable trust cannot be touched by medicaid, creditors, or people who sue you.

The problems with irrevocable trusts are twofold. First, you essentially lose all control over your assets. There are ways to retain some control over your assets with a domestic asset protection trust (a special type of irrevocable trust allowed in some states), but ultimately you will lose a great amount of control over your assets.

Secondly, even if you structure it in a way to make some income off the trust, it is taxed at the highest tax rate if it’s worth over $15,000.

The ONLY benefit is that creditors and medicaid cannot get anything from an irrevocable trust if they sue you.

DO I NEED ONE?

If you are particularly worried about the prospect of medicaid coming after you or you’re underinsured and some freak accident is going to result in a bankrupting judgment against you – then maybe you need one.

There are more affordable ways for non wealthy people to protect their most valuable assets. For example, a life estate deed protects your house against medicaid recovery and creditors for a more affordable fee.

For most regular folks who aren’t wealthy, I don’t typically recommend an irrevocable trust.

Many wealthy people who have an extra million they don’t need will put that money away just to protect against the highly unlikley, off chance they’re sued into oblivion from some freak accident or they spend their remaining years in a nursing home.

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