When you learn that there are revocable trusts and trusts that you cannot revoke, you may wonder why you would sacrifice the flexibility. This makes sense on the surface, but there are some good reasons why this can be beneficial.
In legal parlance, you surrender incidents of ownership when you establish an irrevocable trust, because you cannot act as the trustee, and you cannot revoke the trust. To put it more simply, you get the assets out of your own name by conveying them into the trust.
Let’s look at three reasons why you may want to establish a trust that you cannot revoke later on.
Medicaid Planning
Most senior citizens will require long-term care at some point in time, and 35 percent of elders will eventually reside in nursing homes. In our area, the median annual charge for a private room in a nursing home was $176,660 in 2019, and the average length of stay is one year.
Medicare does not pay for nursing home care, but Medicaid will cover the custodial care that these facilities provide. Since Medicaid is intended for people with limited resources, you cannot qualify if you have more than $1600 in countable assets.
We will not get into all the details with regard to countable versus non-countable assets here, but clearly, you have to divest yourself of resources if you want to qualify for Medicaid.
To do this, you could fund an irrevocable, income-only Medicaid trust. As the name would indicate, you would be able to continue to receive income from earnings that are generated by assets in the trust.
You would not be able to touch the principal, but it would not count if you apply for Medicaid to pay for long-term care.
Estate Tax Efficiency
There is a federal estate tax that is a factor for very high net worth individuals. It is potentially applicable on the portion of an estate that exceeds $11.58 million in value. This is the figure for this year, but there are annual adjustments to account for inflation.
The top rate of the tax is 40 percent, so it can have a significant impact on your legacy if your estate is in taxable territory.
Here in Connecticut, we have a state-level estate tax to contend with as well. The exclusion is just $5.1 million, so you could face state-level exposure even if you are exempt from the federal tax.
If you have estate tax concerns, you have to implement an estate tax efficiency strategy. Irrevocable trusts of different kinds are used to satisfy this objective.
Remarriage Planning
If you are getting remarried as a parent, you may be concerned about your children’s inheritances. To make sure that you protect your children while you take care of your spouse appropriately, you could establish in an irrevocable qualified terminable interest property (QTIP) trust.
To execute this strategy, you fund the trust and you name a trustee to act as the administrator. You could potentially name someone that you know, but many people will engage a professional fiduciary. Trust companies and the trust departments of banks provide trustee services for a fee.
Your spouse would be the first beneficiary, and your children would be the successor beneficiaries. The trustee would distribute the earnings that are generated by income producing assets in the trust to your spouse for the rest of their life if you pass away first.
They could also use property that is technically owned by the trust. Your surviving spouse would be provided for appropriately, but they would not be able to change the terms of the trust. After their death, your children would become the beneficiaries of the trust.
Take Action Today!
We are here to help if you are ready to put a custom crafted estate plan in place, and we are offering remote consultation options. You can schedule an appointment right now if you give us a call at 860-548-1000, and you can fill out our contact form if you would prefer to send us a message.
Mr. Horowitz was awarded his Juris Doctor degree with honors from the University of Connecticut School of Law. While attending law school, Mr. Horowitz received the American Jurisprudence Award in Legal Ethics and the Nathan Burkan Award.
After graduation from law school, Mr. Horowitz continued his legal education at New York University School of Law where he received a Post Doctorate Law Degree in Taxation. He has also recently received a national achievement award.
Mr. Horowitz is admitted to practice before all the state courts in the State of Connecticut and the United States District Court.
Mr. Horowitz was selected for Super Lawyers in 2021.
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