There are different types of trusts that are used in the field of estate planning. A living trust is a commonly utilized device that can be revoked or rescinded by the person that establishes the trust at any time. It can be comforting to know that you maintain control of the assets that you convey into a trust, but there are reasons why you may want to use a trust that cannot be revoked. We will look at some situations that would call for the creation of an irrevocable trust in this post.
Special Needs Planning
Many people that have disabilities rely on Medicaid as a much-needed source of health insurance. There is another government program that is vital for people with special needs called Supplemental Security Income. The name of the device is self-explanatory: SSI provides a modest but steady stream of income to people that cannot earn money on their own because of limitations.
These government programs are only available to individuals that have very sparse financial resources. If you were to leave a significant inheritance to someone that is depending on Medicaid and Supplemental Security Income, they could potentially lose their eligibility until the money was spent.
As a response, you could establish a supplemental needs trust for the benefit of a person with a disability. These programs do not necessarily satisfy all of the needs of the benefit recipient. The trustee that you name in the trust declaration would be able to utilize funds that you convey into the supplemental needs trust to fill in the gaps.
If the trustee acts within the program guidelines, eligibility would remain intact.
In the trust declaration, you would name someone to assume ownership of assets that remain in the trust after the passing of the beneficiary. Medicaid is required to seek reimbursement from the estates of people that were enrolled in the program. However, when a special needs trust has been created by a third-party, the assets are protected from Medicaid recovery efforts.
Nursing Home Asset Protection
A significant percentage of senior citizens will ultimately spend time in nursing homes. The Medicare program will not pay for the custodial care that is delivered by these facilities. Long-term care is extremely expensive, so this gap is a very big deal.
Medicaid will pay for long-term care, and as we have touched upon above, it is only available to people that have very limited financial resources. In New York where we practice law, the limit on countable assets is $15,150 at the time of this writing.
Some assets do not count, including your home, but there is $858,000 equity limit in 2018. Other non-countable assets would include one vehicle, household items and personal effects, wedding and engagement rings and heirloom jewelry, and up to $1500 set aside for final expenses.
When it comes to assets that are countable, you could choose to convey them into an income only, irrevocable Medicaid trust. As the name would suggest, you can continue to receive distributions if you have income producing assets in the trust, but you would not be allowed to touch the principal. The Medicaid program would not count the principal if you were to apply for coverage to pay for long-term care.
Estate Tax Efficiency
There is a federal estate tax in the United States, and here in New York, we also have a state-level estate tax. On the federal level, the first $11.18 million that is transferred is not subject to taxation, but the rest can be whittled down by 40 percent. The state level exclusion at the time of this writing is $5.25 million, so everything that you transfer that is in excess of this amount can be taxed, and the maximum rate is 16 percent.
If you convey assets into an irrevocable trust, they would not be counted when it comes to death taxes, because you would be surrendering incidents of ownership.
Attend an Upcoming Workshop!
We do everything possible to provide educational opportunities to members of our community, because people are more likely to take action when they thoroughly understand the importance of estate planning. Over the coming weeks, we have a series of workshops planned, and you can absorb a treasure trove of useful information if you attend the session that fits into your schedule.
To get all the details, visit our workshop page, and when you identify the date that works for you, follow the simple instructions to reserve your seat.
Michael Robinson, Estate Planning Attorney
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