Benefits and Burdens of the Irrevocable Trust

THE BENEFITS AND BURDENS OF THE IRREVOCABLE TRUST.

What is a Trust?

A Trust is a document that creates a new entity, capable of holding assets and money on behalf of an individual.  Trusts are often used to hold assets such as the family home, for use by future generations.  A Trust is one of the most important parts of an Estate Plan, as it prepares your assets for use by your loved ones, without risking loss of asset value due to taxation.

What Does it Mean for My Trust to be “Irrevocable?”

An Irrevocable Trust, as opposed to the Revocable variant, offers additional protections for Trustors, those establishing the entity, but presents restrictions.  For this reason, it is important to speak with legal counsel in order to determine which Estate Plan is best suited for your family’s needs.

Irrevocable Trusts place the Trustor(s) in a position where they are unable to access their own assets.  This, however, is intentional and can prove highly beneficial.  Although the Trustor would have no ability to directly interact with the Trust’s Bank Account, this distance from their assets grants the potential to be eligible for Medicaid.  This kind of Trust is managed by one or more Trustees, persons that the Trustor names to manage the Trust and its assets.  The Trustees are in charge of making payments to and on behalf of the Trustor, monitoring funds, and distributing the Trust’s assets at the time of the Trustor’s death.

What Are the Benefits?

Despite the restrictions of an Irrevocable Trust, the benefits are often well worth it.  One of the most important protections afforded to Trustors in an Irrevocable Trust is the Medicaid protection.  While planning for Medicaid, it is important to bear in mind the income and asset limits that the government uses to determine eligibility for the program (See our recent Post about the changes in Medicaid guidelines for 2023).  If found ineligible, an applicant would be forced to use their own assets and resources to pay for end-of-life medical care, potentially wiping out hard-earned savings or assets meant for your family when you’re gone.  This kind fo care can be incredibly costly, especially when 41% of Americans are already struggling with medical debt.  (https://www.npr.org/sections/health-shots/2022/06/16/1104679219/medical-bills-debt-investigation).  An Irrevocable Trust allows us to place our assets into a separate entity, held for our benefit, so that we can meet the eligibility requirements for Medicaid once it’s time to apply.  A properly drafted Trust will grant the Trustor the ability to enjoy the benefits of ownership while maintaining sufficient distance from assets so that the ownership does not harm eligibility.

Furthermore, a Trustor maintains the right to live in any home that is transferred into the Trust for their entire lifetime.  While remaining in the home, any existing STAR or Enhanced STAR property tax relief will continue to apply, despite the ownership changing to the Trust.  The Trust can also be set up to include only income, allowing for any rent generated by Trust Property to be collected by the Trustor.  Finally, if the family home, held in Trust, is sold during the lifetime of the Trustor, a capital gains tax exclusion can be employed in the amount of $250,000 (single) or $500,000 (married).

What are the Burdens?

As with all things, there are sacrifices in order to obtain these benefits.  As discussed above, an Irrevocable Trust takes the control over the assets out of the hands of the Trustor.  This means that a person establishing their Trust must rely on their Trustees to properly apply and distribute the Trust’s assets where necessary.  Also, while the Trustor would not be capable of revoking the Trust, they can exercise a “limited power of appointment” to remove or substitute Trustees if they require.

Conclusion

In conclusion, an Irrevocable Trust is capable of shielding our assets, not only from creditors, but from Medicaid scrutiny.  In order to properly use this kind of Trust, it is important that the Trustor relinquish control over their assets, and pass that control on to their Trustee.  The Trustee will then be in charge of using the Trust for the benefit of the Trustor during their lifetime, and then will distribute the Trust’s assets after the Trustor’s demise.  This process is critical for obtaining Medicaid eligibility and, if done properly, can result in free or low-cost medical care at a time when we need it most.

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