What Is the Difference Between a Revocable & Irrevocable Trust?
Under New York Estates, Powers and Trusts Law (EPTL) Article 7, a trust is a legal arrangement where a grantor transfers assets to a trustee to manage for named beneficiaries. The primary difference between revocable and irrevocable trusts centers on control, flexibility, and asset protection.
Both types of trust can pass assets to loved ones outside of probate, but they differ in important ways:
Revocable Trusts
- You keep full control and can change or cancel the trust at any time.
- Assets aren’t protected from creditors or Medicaid eligibility rules.
- Assets remain part of your taxable estate.
- The trust can help manage your affairs if you become incapacitated.
Irrevocable Trusts
- You can’t change the trust or reclaim the assets.
- Assets may be protected from your future creditors.
- After a five-year lookback period, assets may not count toward nursing home Medicaid eligibility.
- Depending on its structure, the trust may remove assets from your taxable estate.
Our attorneys can help you weigh control against protection and draft a trust that fits your goals.
When Should a Family Consider a Supplemental Needs Trust?
A supplemental needs trust (SNT), also known as a special needs trust, provides financial support to beneficiaries with disabilities without disqualifying them from essential government assistance programs, such as Supplemental Security Income (SSI) and Medicaid.
Because government benefits only cover basic food, shelter, and medical care, an SNT allows families to fund secondary expenses that enhance the beneficiary's quality of life, such as specialized care, education, hobbies, and personal comfort items.
A third-party SNT is funded by parents or relatives and has no Medicaid payback requirement. A first-party SNT holds the beneficiary’s own funds, such as an inheritance or settlement, and generally must repay Medicaid after the beneficiary’s death.
Leaving money directly to a loved one with a disability can put their benefits at risk. What we typically recommend is naming the SNT as the beneficiary of life insurance and other accounts, and asking relatives to direct gifts to the trust. Our guardianship practice can also help plan for decision-making as your loved one reaches adulthood.
How Do You Fund a Trust to Bypass Probate?
A trust only controls the assets transferred into it. If your home or accounts remain in your individual name, they may still go through probate. Funding usually involves:
- Signing and recording a new deed to transfer real estate into the trust.
- Retitling bank and investment accounts in the trust’s name.
- Updating beneficiary designations on life insurance and retirement accounts when appropriate.
- Assigning business interests and other valuable property to the trust.
We can help you prepare and record the deed, provide clear instructions for each account, and review existing beneficiary designations for conflicts. We may also prepare a “pour-over” will to direct any overlooked assets into the trust, although those assets may still require probate.
Protecting Fiduciaries & Trustees from Personal Liability During Trust Administration
Serving as a trustee carries serious legal responsibility. Trustees must act in the beneficiaries’ best interests, invest prudently under EPTL § 11-2.3, keep trust funds separate, and follow the trust’s terms for distributions. A trustee who makes a mistake, even an unintentional one, may be held personally liable.
Common risks include distributing assets before setting aside enough for taxes and expenses, failing to keep beneficiaries informed, and incomplete recordkeeping. A formal accounting of income, expenses, and distributions is often a trustee’s best protection.
Our attorneys guide trustees through each decision and help prepare accountings. When disputes arise or the trust’s terms are unclear, we can ask the Surrogate’s Court for guidance or to approve the trustee’s accounting. Court approval may release the trustee from liability for the matters covered.
What Are the Tax Implications of Setting Up a Trust?
Understanding tax obligations is a critical component of trust planning. Tax treatment depends on whether a trust is structured as a grantor trust or a non-grantor trust under federal Internal Revenue Code (IRC) guidelines and state tax laws.
With a revocable grantor trust, all trust income is reported directly on the grantor's individual tax return (Form 1040), maintaining neutral tax consequences during the grantor's lifetime. Irrevocable non-grantor trusts are separate tax entities that require an independent tax identification number (TIN) and must file fiduciary income tax returns (Form 1041).
Because non-grantor trusts reach higher tax brackets at significantly lower income thresholds, proper income distribution planning is necessary to avoid excessive tax exposure. Additionally, irrevocable trusts can be structured to leverage federal and state estate tax exemptions, preserving family wealth across generations.
Our lawyers can explain how each option affects income, gift, and estate taxes, including the capital gains impact for your heirs. We collaborate with financial advisors and accountants to craft estate plans that optimize tax efficiency while fulfilling your personal distribution wishes.
Strategic Trust Planning That Accounts for Blended Families, Prenups, & Divorce
Many blended families want to provide for a current spouse while protecting an inheritance for children from a prior relationship. A qualified terminable interest property (QTIP) trust can provide income to a surviving spouse for life, with the remaining assets passing to your children afterward. Trust planning should also work with prenuptial agreements, which may waive a spouse’s right to claim a share of the estate.
In our experience, many people assume a divorce automatically updates their entire plan. New York law revokes many provisions for a former spouse after divorce, but certain employer retirement plans governed by federal law may still pay an ex-spouse if the beneficiary form isn’t changed. Our family law practice can help coordinate your trust with your prenup, divorce, or remarriage to provide comprehensive protection.
From Medicaid planning to SNTs, our trust lawyers craft tailored solutions to protect your loved ones. Contact us online to discuss your case.
