Tags Posts tagged with "Irrevocable Trust"

Irrevocable Trust

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By Nancy Burner, Esq.

Nancy Burner, Esq.

Many people use irrevocable trusts as part of their estate plan for tax savings, asset protection and Medicaid planning. In all these types of trusts, the grantor (creator) of the trust is going to be limited to their access of the principal of the trust in order to ensure that their planning needs are met. This means that their ability to use trust assets as collateral for a loan is going to be limited. 

A concern that should be discussed before transferring real estate to an irrevocable trust, is whether or not you 1.) have an existing mortgage and plan to refinance in the near future and 2.) whether you think you may need to get a new mortgage or line of credit in the near future?

It is common, particularly in Medicaid planning, to transfer real estate to your irrevocable trust because Medicaid trusts typically provide that the grantor can reside in the property and shall maintain all tax exemptions formerly afforded to them. This makes the home an easy asset to protect since the transfer does not affect everyday use of the property. The biggest exception is the Grantor’s ability to refinance or secure new mortgage products once the property is in a trust since many banks will not lend to properties owned by an irrevocable trust.

While most irrevocable trusts do not expressly prohibit the Trustee from securing a mortgage with a trust asset, the loan industry’s underwriting guidelines typically do not allow it. 

Luckily, some banks are catching up with the times and have special products which can be secured against properties in irrevocable trusts. However, you should expect to pay higher interest rates.

If your preferred lending institution will not work with your property in the trust, then it may be possible to revoke the trust with the consent of the grantor and beneficiaries. However, once a trust is revoked, it will no longer afford you the planning goals it once did.
In other words, if your house was in a Medicaid Trust for 7 years and you revoke it to avail yourself to the low interest rates now available for mortgages, it will no longer be protected. The home would have to be placed in another Medicaid trust for an additional 5 years before it would be protected again should you require nursing home care and ask that the Medicaid program pay for said care. 

Always speak to your attorney before taking any asset out of an irrevocable trust. While everyone wants to pay the lowest interest rate possible, the protection you are getting by keeping the assets in the trust may outweigh the cost savings. If beneficiaries will not consent, or cannot consent due to death, disability or minority, the Trustee may be able to “decant” the irrevocable trust assets to a new trust with different terms which the bank may find more favorable. Decanting requires a Trustee who is not an interested party, so if the current Trustee is also a beneficiary, a new Trustee will need to be appointed. 

Decanting has become popular in recent years not only for amending trusts to please the lenders, but to fix a myriad of issues that older trusts may present. This is a specialized area of the law and you should seek counsel that is familiar with sophisticated trust and estate principles before transferring any asset from one trust to another.

In sum, transferring your property to an irrevocable trust will likely limit your choices for refinancing or mortgaging the property in the future. If this is something you are considering, speak to your attorney about obtaining financing before you transfer your house to the trust to avoid the hassle later.

Nancy Burner, Esq. practices elder law and estate planning from her East Setauket office. Visit www.burnerlaw.com.

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By Linda M. Toga, Esq.

The Facts:  I created an irrevocable trust a number of years ago. However, my circumstances have changed dramatically, and the trust no longer suits my needs. I want to revoke the trust and sell the assets that are in the trust.

The Question: Although the trust is irrevocable, is there a way it can be revoked?

The Answer: Good news! Fortunately, there are circumstances when an irrevocable trust can, in fact, be revoked. If your needs and goals have changed to the point that the trust no longer serves a useful purpose, you may want to amend or revoke the trust. Whether you are able to do so will depend on the language of the trust document itself and the cooperation of the beneficiaries.

Generally, if all of the beneficiaries are of legal age and competent, they can sign a document giving their consent to the amendment or the revocation of the trust. The beneficiaries’ signatures must be notarized for the amendment/revocation to be effective. If any of the beneficiaries are minors, you will not be able to amend or revoke the trust since minors cannot legally give consent.    

Assuming that you are able to revoke your trust, you will also have to change the title on any trust assets such as real property or motor vehicles that have recorded titles. Accounts held by the trust will also need to be retitled if the trust is revoked. This may or may not need to be done if you simply amend the terms of the trust without removing trust assets.

When amending or revoking a trust, it is very important that the document setting forth the changes to be made to the trust properly identify the trust and the beneficiaries. It is also important that all trust assets be accounted for and properly retitled when appropriate.

To avoid mistakes and problems down the road either with an unhappy beneficiary or with assets that are still held by a trust that no longer exists, it is best to retain the services of an attorney with experience creating and revoking trusts.

Linda M. Toga, Esq. provides legal services in the areas of litigation, estate planning and real estate from her East Setauket office.