Should my estate plan include an irrevocable trust?
While clients often come to us for assistance with creating a will, we also design estate plans that consider other estate planning objectives, particularly asset protection, minimizing taxes, and providing for loved ones. In these situations, many individuals are well served by establishing an irrevocable trust.
What is an Irrevocable Trust?
An irrevocable trust is one that becomes effective during a person’s lifetime, however, unlike a revocable trust, it cannot be amended or modified. The trust maker (or grantor) permanently transfers property into the trust so that he or she no longer owns the property. Instead, a trustee is designated to manage the assets for the beneficiaries.
Irrevocable trusts provide a number of benefits, not the least of which is the fact that the property is not subject to estate taxes. Additionally, an irrevocable trust does not have to go through a probate proceeding, which keeps the financial arrangements private. Finally, a properly designed trust will protect the assets from creditors.
Some of the more common irrevocable trusts are as follows:
- Medicaid Asset Protection Trusts – These trusts are used as part of an elder law plan to protect assets such as real estate or stocks and bonds from being counted as available resources for purposes of medicaid eligibility. They can be designed to allow the grantor to retain the income benefit of these assets, while protecting the principal from creditors. In addition, they can be designed to keep the assets in the grantor’s taxable estate, allowing for a step-up in basis to date of death valuation and minimizing the capital gains tax consequences to the ultimate beneficiaries upon the death of the grantor.
- Bypass Trusts – These trusts are best suited for married couples who have acquired significant assets above the federal exemption amount (currently $10.9 million) in order to reduce estate taxes when the second spouse dies. In this arrangement, the property of the spouse who dies first is transferred into a trust for the benefit of the surviving spouse. Because that spouse does not own it, however, the property does not become part of this his or her estate.
- Charitable Trusts – The goal of these trusts is to reduce the grantor’s income and estate taxes by combining gifting with charitable donations. In a charitable remainder trust, for example, the grantor transfers property into a trust and names a charity as the final beneficiary. Before the designated charity receives the property, another individual receives income for a specified time period.
- Life Insurance Trusts – Although the proceeds of life insurance pass outside of an estate, they are factored into the estate’s value for tax purposes. In this arrangement, ownership of the policy is transferred into the trust, the proceeds are removed from the estate and taxes can be minimized.
- Spendthrift Trusts – These trusts are often utilized by those who have troubled heirs, such as a children who are not capable of managing their finances, those with history of not paying debts, or who have problems with gambling, drugs or alcohol. Here, a trustee can be named to manage the funds, make purchases of goods and services for the beneficiary, distribute the funds to the beneficiary, or make payments directly to landlords and creditors.
- Special Needs Trusts – Because an inheritance could disqualify a beneficiary with special needs from public benefits such as Medicaid, Medicare, or Social Security Disability, a special needs trust can provide money for additional day-to-day expenses while preserving those essential benefits.
Although irrevocable trusts are effective estate planning tools, they are also quite complicated. For this reason, you are well advised to seek the advice of the experienced estate planning attorneys at Merlino & Gonzalez. Call our office today at (718) 682-7015 to set up a consultation. We serve clients in Staten Island and throughout New York and New Jersey.