They say that you should use the right tool for the right job, and there are many different tools that can be used when you are planning your estate. The optimal course of action will vary depending on the circumstances.
Trusts can be used to accomplish numerous different objectives, but all trusts are not created equal. There is the revocable trust, and there are also irrevocable trusts. On the surface, the general difference is self-evident: you can revoke or rescind one type of trust, and you cannot revoke the other.
This is well and good, but what are the implications? Let’s look at the answer to this question.
Revocable Living Trust
With a revocable living trust, you do not surrender control of the assets. You can revoke the trust, and you can act as trustee and the beneficiary initially. This can be comforting if you want to be able to access assets in the trust if you ever need them while you are alive and well.
If you establish a revocable living trust, the right to revoke the trust is not the only level of control. During your life, you can act as the trustee, so you retain complete control of the assets. You can also act as the beneficiary initially.
You name a successor trustee, and you also name successor beneficiaries when you create the trust agreement. In this agreement, you can leave behind instructions regarding the way that you want the assets to be distributed to the beneficiaries. These distributions would take place outside of the timely and cost intensive process of probate, and this is a major advantage.
A revocable living trust can be a good choice for many people, but you have to be aware of the fact that some objectives would not be satisfied through the utilization of this type of trust. This is because of the fact that you do retain direct control of the assets while you are living.
Value of Irrevocable Trusts
We are going to speak generally when we talk about irrevocable trusts, because there are a number of different types of irrevocable trusts. These trusts are used when you want to divest yourself of direct personal ownership of assets for one reason or another.
With this type of trust you are surrendering incidents of ownership. The assets belong to the trust. They no longer belong to you, and you cannot change your mind and revoke the trust.
Because you do in fact surrender incidents of ownership, you gain certain advantages. Creditors or claimants could not seek to attach assets that were held by the trust if there was a claim against you personally. For this reason, some types of irrevocable trusts are used for asset protection purposes.
There is also the matter of estate tax efficiency. If you are exposed to the federal estate tax, you could potentially convey assets into an irrevocable trust to gain estate tax efficiency. The tax could be imposed on the portion of your estate that exceeds $5.45 million.This figure is called the credit or exclusion.
We practice in the state of Connecticut, and in our state, there is also a state-level estate tax that carries a $2 million exclusion.
When you fund an irrevocable wealth preservation trust, you are removing the assets from your estate for estate tax purposes.
If a beneficiary would be assuming ownership of assets that have been conveyed into the trust, there could be gift tax implications, but that is a subject for a different post.
Medicaid is a government health insurance program that will pay for long-term care. Medicare will not pay for a stay in a nursing home or assisted living community. Because Medicaid is a need-based program, there are income and asset limits.
You could potentially convey assets into a particular type of irrevocable trust prior to applying for Medicaid coverage. Because you are surrendering incidents of ownership, the assets would not count against you.
A revocable living trust would not satisfy any of these objectives. The assets in the trust would be part of your estate for tax purposes, they would not be protected from creditors and claimants during your lifetime, and they would be countable if you were to apply for Medicaid.
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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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