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Irrevocable Trusts

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By Jennifer B. Cona, Esq.

Jennifer B. Cona, Esq.

All trusts are not created equally; there are many different types of trusts used for a variety of purposes, such as asset protection planning, financial management, probate avoidance and tax planning. Two common types of trusts in estate and asset protection planning are revocable and irrevocable trusts.

A revocable trust is a trust where you, the trust creator, reserve the right to revoke or change the trust at any time. If properly structured and funded, a revocable trust can be helpful in avoiding probate and allowing for easier management of assets in the event of incapacity. If you own homes in more than one state, it may make sense to place your out-of-state property in a revocable trust to avoid the need for probate in two states. Beware, however, that a revocable trust offers no asset protection. For Medicaid purposes, all of the assets in a revocable trust are considered available and may have to be spent down on the costs of care.

The better option for most older adults is an irrevocable trust. This type of trust cannot be revoked or changed by you alone, but can be with the consent of the trust beneficiaries. The benefit of making a trust irrevocable is that it can be structured as a Medicaid asset protection trust.

An irrevocable trust set up for asset protection purposes can hold almost any type of asset, including your home, bank accounts, and investments. You cannot have access to the principal of the trust, but you can retain the right to receive the income (dividends and interest). After five years have passed, the assets held in the trust are protected with respect to Medicaid. You would not have to spend down those assets on the cost of care; they are protected and will be inherited by your beneficiaries.

By properly planning ahead, your assets can be maintained for quality-of-life items and ultimately left to your heirs. But creating the trust is only the first step. The trust also must be funded, meaning assets must be transferred or re-titled into the name of the trust. For example, bank and brokerage accounts need to be retitled in the name of the trust. When transferring real property to a trust, you will need to sign a new deed naming the trust as the owner of the property.

For many families in the metro NY area, their most valuable asset is their home. As such, we often transfer title to the home to the irrevocable asset protection trust in order to protect its value. You can still sell your home, purchase a new property, keep your real estate tax exemptions, and no one can sell your house without your consent. Other assets can be placed in a trust for asset protection purposes as well, such as investment accounts, bank accounts, mutual funds, and life insurance. 

With the escalating cost of healthcare, it is more important than ever for older adults to protect the assets they worked their whole lives to save from a sudden healthcare crisis. An irrevocable trust is an important tool in that asset protection plan. 

Be sure your Elder Law and Estate Planning attorney understands the extent of your assets and listens carefully to your concerns and goals so that together you can create a customized trust, estate and elder law plan.

Jennifer B. Cona, Esq. is the Founder and Managing Partner of Cona Elder Law located in Melville and Port Jefferson. The law firm concentrates in asset protection, estate planning, Medicaid benefits, probate and special needs planning. For information, visit www.conaelderlaw.com.

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By Nancy Burner, Esq.

Nancy Burner, Esq.

Commonly, clients will create a trust to protect certain assets in case they need to apply for government benefits as they get older and require assistance with their daily activities. While certain provisions of this type of trust will be consistent from client to client, not all trusts are the same. Understanding your trust is the first step to successfully achieving your estate planning goals. 

The drafting process of the trust document is vital because it outlines the rules of the trust. Without understanding these rules, the creator of the trust or the trustee may be in jeopardy of making the trust assets available when they are assessed for Medicaid eligibility.  

The irrevocable trust for Medicaid purposes will state who the creator of the trust is and who is appointed by that person to serve as trustee of the trust. The document should also include a provision stating that the creator of the trust will not have access to any trust principal. 

Beyond that, multiple decisions need to be made by the client, in consultation with their attorney. These decisions will include whether or not the creator will have access to income generated from the trust, who will be able to remove a trustee or appoint a successor trustee, if the creator can change the beneficiaries of the trust and other critical points for the operations of the trust during the creator’s lifetime and after death.  

Part of the rules of the trust will include the distribution at the death of the creator. The trust says who will receive the assets at that time and how they will receive those assets. The distributions may be outright or in a further trust to protect the beneficiary from creditors or from losing government benefits they are receiving.  

If there is real property owned by the trust, the document could also direct who may live there before and after death, who is responsible for the costs associated with the property and whether it should be sold upon the death of the creator.  

Once the document is signed by the creator and the trustee(s), the next important step is to fund the trust. This means changing the ownership or title of certain assets to the name of the trust. It will make sense for a financial adviser and accountant, if you have either, to be aware of your trust and which assets you have placed into it. These advisers can work with you and your attorney to determine which assets to transfer into the trust and which to keep in your individual name. 

Trusts are often funded with real property, bank accounts, investment accounts and savings bonds. All assets that are transferred into the trust are then managed by the named trustee. This trustee can sell the assets in the trust, collect rents or any other income and reinvest the assets in alternative ways. The precise powers that the trustee holds are dictated by the trust document.  

A trust is a live entity that owns property and assets. It should be reviewed regularly, at least every five years, to make sure the trust rules are being followed and the trust continues to achieve your estate planning goals. Your trusted estate planning and elder law adviser should review these documents with you.  

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

By Nancy Burner, Esq.

Nancy Burner, Esq.

For many clients the idea of creating and funding an irrevocable trust with an end goal of protecting assets should the need for long-term care arise raises questions and concerns about the potential tax implications.

Specifically, questions surrounding taxation of the assets that are transferred to the trust and concerns about losing property tax exemptions such as STAR and Enhanced STAR are common in our practice.

Although there is some truth to the idea that there could be negative higher taxation when income is earned on assets held in a trust, the grantor trust rules of the Internal Revenue Code provide that where a trust is created as a grantor trust, following the rules set forth under the IRC Sections 671 through 678, the income earned and assets held within will be treated for tax purposes as if they are still owned by the grantor. As a result, any income earned by the trust will be taxed at the (presumably) lower rate of the grantor and all tax abatements can be retained as the grantor will typically retain beneficial ownership of the property.

Although grantor trusts are subject to the same general rule for tax reporting as other trusts, specifically trusts with gross income that exceeds $600 are required to report, the method of reporting is far less complicated than you may expect. The trust may file a form 1041, U.S. Income Tax for Estates and Trusts form. In this case we refer to the 1041 as an “information only” return, listing the name of the trust, the tax identification number and the address used for notices on the trust.

By doing this the IRS is placed on notice that the trust exists, and that all income and any other relevant information will be reported on the grantor’s personal return. This provides that the grantor will be treated as the owner of the assets held in the trust; and, accordingly, all income earned from the trust is reportable on the grantor’s personal tax return. Although there are alternate reporting methods available, we have found this method to be the most convenient for most of our clients.

With respect to the transfer of real property to an irrevocable grantor trust, because the grantor is considered the beneficial owner of the trust all tax benefits that flow to individual owners of real property will continue on uninterrupted. Where the homeowner benefits from tax reductions through the STAR or Enhanced STAR program, veteran’s benefits or any other tax rebate, transfers into a properly drafted irrevocable grantor trust will allow those benefits to continue.

Finally, because the assets are still considered part of the grantor’s estate for tax purposes, upon the death of the grantor, the beneficiaries will benefit from a full step-up in basis on the value of the home or any other appreciated asset, eliminating any concerns about capital gains implications.   

By creating and funding an irrevocable grantor trust, the grantor is able to protect assets if the need for long-term care arises while preserving grantor tax status and tax advantages and exemptions.

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