The type of trust that is most commonly used is the revocable living trust. Many people are comforted by the idea that it is possible to change your mind and dissolve the trust at some point in the future. Plus, if you create this type of trust, you have control even while you are alive and well.
As the grantor of the trust, you could serve as the trustee and the beneficiary at first. In the trust declaration, you would name successors to assume these roles after you are gone. You can change the terms at any time, and you can also add and remove property from the trust after it has been created.
In addition to revocable trusts, there are also irrevocable trusts. Since you have so much freedom with the former variety, you may wonder why anyone would ever use a trust that cannot be revoked. This is a logical line of thinking, but there are some objectives that cannot be accomplished through the utilization of a revocable trust.
Incidents of Ownership
The key here is the legal concept of “incidents of ownership.” When you establish a revocable living trust, technically, the trust would own the property that has been conveyed into it. However, you as the grantor would have complete control of this property, so you would be retaining incidents of ownership.
In a real sense, the property would still belong to you. As a result, if you are the subject of a lawsuit, assets in the trust would be within reach of litigants seeking redress.
On the other hand, if you establish an irrevocable trust, you would be surrendering incidents of ownership. You would no longer have control of the assets, and this could serve you well when certain circumstances exist.
Estate Tax Efficiency
One reason to convey assets into an irrevocable trust would be to obtain estate tax efficiency. The federal estate tax is not a factor for most people because there is a $11.58 million credit or exclusion. This is the amount that can be transferred before the tax would kick in, and there is a maximum rate of 40%.
For tax purposes, assets that are in an irrevocable trust would not be part of an estate. Qualified personal residence trusts, grantor retained annuity trusts, generation-skipping trusts, and charitable remainder trusts are some of the irrevocable trusts that are used.
Most senior citizens will eventually need some type of long-term care, and 35% of elders will reside in nursing homes. These facilities are very expensive, and Medicare does not pay for living assistance. Medicaid will pay for nursing home care, but there is a low asset limit, because it is a need-based program.
In spite of this, Medicaid pays for a very significant percentage of the nursing home care that is received in the United States. To divest yourself of assets so you can qualify for Medicaid, you could convey them into an irrevocable income-only Medicaid trust.
The principal would be out of your reach, but it would not count when Medicaid was tallying up your assets if you were to apply for eligibility. This being stated, you would be able to accept distributions from the trust’s earnings until and unless you qualify for Medicaid.
Special Needs Planning
A lot of elders use Medicaid to pay for long-term care, and people with disabilities also rely on Medicaid for health care coverage throughout their lives. Another need-based program that is important for people with special needs is Supplemental Security Income (SSI).
If you were to leave a significant direct inheritance to a loved one with special needs, benefit eligibility could be lost. However, if you establish an irrevocable supplemental needs trust for the benefit of a person with a disability, eligibility would remain intact.
The trustee would be able to use assets in the trust to make the beneficiary more comfortable, so it would be a win-win situation all the way around.
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We would be glad to help if you would like to discuss your estate planning objectives with a licensed attorney. You can call us at 518-389-6020 to schedule an appointment in Albany, New York, and our Vermont office can be reached at 802-879-7133.There is also a contact form on this website that you can use to send us a message.