Can an Irrevocable Trust Be Reversed?

Can an Irrevocable Trust Be Reversed?
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The ownership of assets and property that would ordinarily be part of your estate transfers to another legal entity, the trust, when you form one. The assets don’t have to pass through probate when you die because the trust now owns them, and the trust remains alive.

Forming an irrevocable trust rather than a revocable trust makes it harder to reverse this arrangement, and there are some disadvantages to doing so. Taxes may become due and creditors can get to your previously-protected assets.

When a Trust Is Invalid

When you place your assets in an irrevocable trust, you give up your ability to remove one or more of them at a later time, to add an asset, or to add or delete beneficiaries. You’re making a big move toward the management of your estate, and you must be of sound mind when you decide on the terms, just like when you write a will.

You can also challenge the trust just as you would contest a will if you or your beneficiaries can later prove that you weren't of sound mind or that you created the irrevocable trust under duress from one of the beneficiaries. This would involve filing a lawsuit with the court, the same as with a will challenge.

The Consent of Trust Beneficiaries

You can also reverse an irrevocable trust if all its beneficiaries agree that this should occur. Your financial situation might radically change, and you wouldn't be able to liquidate any of your assets to pay your bills if all your significant assets were placed in an irrevocable trust.

You can revoke the trust if you're its sole beneficiary, usually by filing a petition with the court. But all beneficiaries must agree to dissolve the trust so you can have access to your assets if there are others. The procedure for doing this varies from state to state.

You can have them all sign a written document confirming their agreement in New York. You must sign the document as well. Other states might require that everyone appear in court to give testimony that they desire to reverse the trust and to provide the judge with a good cause.

Irrevocable Trusts and Minor Beneficiaries

You might have trouble revoking your trust if any of its beneficiaries are minors. For example, New York doesn't allow minors to sign such an agreement. Other states might allow a parent or guardian to give consent on a child's behalf.

You might be able to dissolve it by moving its assets to a new, different trust if your trust includes a minor as a beneficiary and that minor can't legally give her consent. But this can be a complicated procedure with several risks, so consult with an attorney or financial adviser if you opt to go this route.

Irrevocable Trusts and Medicaid

Assets you’ve placed in an irrevocable trust won’t count against you if you foresee applying for Medicaid because you don't actually own them anymore. But Medicaid imposes a five-year “look back” period. It will impose substantial penalties based on the dollar value of the assets you've placed there if you find yourself in a position where you must apply for Medicaid during those five years.

You could potentially have to wait a month or more for each increment of the trust’s value before you can apply for Medicaid within that five-year period, depending on the laws of your particular state.

Dissolving the trust won't affect the Medicaid rule. It’s based on the fact that you created the trust in the first place. Speak with an attorney about how your beneficiaries might be able to get to the assets during your lifetime if they absolutely have to.