Irrevocable Trust vs. Life Estate: What’s the Difference?

In Investopedia’s recent article, they ask the question on the difference between life estate and irrevocable trusts (“Life Estate vs. Irrevocable Trust: What’s the Difference?”). In our blog, we explore what each is, the differences between the two, and how these tools can be an effective way to make sure that your assets are transferred to the right party. 

What is a Life Estate?

Is a life estate a trust? A life estate is used to gift property by dividing the ownership of that property between the giver and the recipient. With a life estate, the recipient will have ownership of the property but is not the actual owner (the giver is). This method allows for a smooth transfer of property to a beneficiary, and allows the property owner to qualify for low-income programs such as Medicaid while still retaining ownership in the property.

For example, a parent may create a life estate to lower their assets in order to meet the asset limits for Medicaid. In this situation, a parent can still have a stake in the property but Medicaid will not count it as an asset. 

Can Life Estates Be Modified or Revoked?

While life estates can be changed or terminated, they can be difficult to do so because they require the consent of all the beneficiaries listed on the property. If the property owner wants to sell the property or remove someone, he/she must obtain legal permission from beneficiaries.  

What is an Irrevocable Trust?

Similar to a trust, an irrevocable trust allows you to place your assets or properties into a trust. However, with an irrevocable trust, you cannot change, modify, or cancel it except in specific circumstances. You essentially relinquish control of the trust to the trust, and once you pass away, the assets of the trust will be distributed to the beneficiaries. 

The benefit of an irrevocable trust is that it can transfer large assets so that you can qualify for low-income programs such as Medicaid. It also offers tax advantages for those with very large estates.

Should I Set Up a Life Estate or Irrevocable Trust?

A life estate and irrevocable trust are not mutually exclusive. You can have a life estate while putting your home into an irrevocable trust. In this situation, you are irrevocably transferring ownership of your home into the trust - while still retaining control. You can still sell the home, remodel, or rent it out. The proceeds of it would still be kept in the irrevocable trust. 

An attorney can guide you through the details and what can help achieve your goals. 

Explore Your Options with Our Estate Planning Attorney

Both life estates and irrevocable trusts have their pros and cons. We can go over your situation and recommend a solution that works for your family. It may be one or a combination of the two. 

Contact our experienced elder law and estate planning lawyers today to learn more.

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