By Barry Zimmer on March 19th, 2019 in Estate Planning
In the field of estate planning, there are revocable trusts, and there are irrevocable trusts. When you do not know much about the subject, a logical question would come to mind. Why would you take the risk of creating a trust that you cannot revoke if there is a more flexible option available to you?
This makes sense on the surface, but there are a number of different scenarios that would call for the utilization of an irrevocable trust of some kind. Before we explain the details, we should first provide some information about the value of revocable living trusts.
If you establish this type of trust, you would be called the grantor of the device. The grantor or trust creator can initially serve as the trustee, which is the trust administrator, and the beneficiary. Since you can assume these roles, you maintain total control of the trust throughout your life. You can add or subtract assets, and you can dissolve the trust entirely if you ever choose to do so.
Many elders become unable to make sound decisions at some point in time, and you can account for this when you have a revocable living trust. When you establish the trust agreement, you can name a disability trustee to take over in the event of your incapacitation.
A major advantage that is to be gained through the utilization of a living trust is the ability to include spendthrift protections. You can instruct the trustee that will manage the trust after you are gone to distribute limited assets to the beneficiary or beneficiaries over an extended period of time. This would prolong the viability of the trust, and you can custom craft the stipulations in any manner that you choose.
Surrendering Incidents of Ownership
When you have a revocable living trust, you maintain incidents of ownership, because you have the power of revocation. For this reason, in the eyes of the law, the assets in the trust are still in your direct personal possession. This is not a good thing when you are trying to satisfy certain aims.
There are circumstances that can exist that would compel you to position assets outside of your own name, and the need for estate tax efficiency is one of them. Most people are not exposed to this tax, because there is an $11.4 million credit or exclusion. This is the amount that can be transferred before the estate tax would kick in.
If you are in rarefied financial territory and you do face exposure, the potential asset erosion is significant, because the estate tax carries a 40% maximum rate. When you convey assets into an irrevocable trust, you surrender incidents of ownership. As a result, they would no longer be part of your estate for tax purposes, and this is why high net worth individuals often use irrevocable trusts.
Most people will need long-term care eventually, and Medicare does not pay for a stay in a nursing home or any other type of custodial care. Medicaid will pay for living assistance, but you are probably aware of the fact that it is only available to people with very limited financial resources.
To qualify for Medicaid to pay for long-term care, you could convey resources into an irrevocable income only Medicaid trust. You would not be able to touch the principal, and it would not be looked upon as your personal property if you apply for Medicaid. This being stated, you would be able to continue to receive income that is earned by assets in the trust until and unless you enroll in the Medicaid program.
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These are a couple of the different reasons why people sometimes use irrevocable trusts, but there are others. There are many tools in the estate planning toolkit, and this is why it is very important to discuss all of your options in detail with a licensed attorney.
If you would like to do just that, we are here to help. You can send us a message to request a consultation appointment, and we can be reached by phone at 513-721-1513.