Almost all of my clients incorporate a revocable living trust as one part of their estate planning. I am often asked questions which have a trust based solution, but which call for an irrevocable trust in addition to a revocable living trust. This post summarizes, in broad terms, when such a trust might be useful.
When Only an Irrevocable Trust Will Do
I realize that it may seem counterintuitive to create a trust that you cannot modify and can never revoke. Don’t you want to control things while you can? The answer for most people is yes, but sometimes the whole goal of trust planning is to establish a structure under which your goals are served but the assets you transfer to the trust are not understood or treated as belonging to you in the traditional sense. To do this you must use an irrevocable trust. The most common purposes include the following:
- Medicaid Planning — Almost half of all seniors in nursing homes across the country depend on Medicaid to help defray the high cost of that care. Qualifying for Medicaid, however, can be problematic for people because eligibility is based, in part, on an applicant’s income and assets. If your non-exempt assets exceed the limit at the time you apply for Medicaid, you will be forced to “spend-down” those assets, which essentially means sell the assets to help cover your nursing home costs. One way to avoid that outcome is to establish a Medicaid trust as part of a Medicaid planning component in your estate plan. A Medicaid trust is an irrevocable living trust that protects your non-exempt assets and allows you to qualify for Medicaid when you need it. The Medicaid program will only recognize the trust as a legitimate Medicaid trust if it is irrevocable.
- Asset Protection — Asset protection should be a consideration in every estate plan because there are likely more potential threats to your assets than you realize. Divorce, economic downturns, creditors, and even spendthrift beneficiaries can all create a threat to your hard-earned assets. By transferring assets into an irrevocable living trust, you remove those assets from your estate — or the estates of future beneficiaries — thereby placing them out of the reach of the numerous threats that could be lurking around the corner. The concept is simple. If you no longer have any legal ownership interest in the assets because they are now owned by the trust, they cannot be lost to divorce, creditors, or any of the numerous other potential threats.
- Estate Tax Planning — For my clients who have or may have a taxable estate, concerns about planning to reduce tax exposure can be critical. An irrevocable trust is a common planning tool, particularly focused on the transfers of appreciating assets so that the appreciation occurs on a post estate tax basis.
- Special Needs Planning — If you are the parent of a child with special needs, you already know some of the challenges faced when raising a child with special needs. You also probably already have some idea of the costs involved and the time needed. Consequently, for the parents of a child with special needs, estate planning takes on heightened importance. While your child is a minor, obtaining assistance from state and federal programs such as Medicaid and Supplemental Security Income is crucial. Depending on the type and severity of your child’s disability, your child may continue to need that assistance as an adult. Unfortunately, the law considers your child a legal adult when he/she turns 18 which means eligibility for state and federal assistance programs will be based, in part, on your child’s income and assets. Though the income limits won’t be a problem, the asset limit could be if you, or another well-meaning relative, gift assets directly to your child in an estate plan or at any other time. Your child could lose his/her eligibility for much-needed assistance. The good news is that a Special Needs Trust can help. A special needs trust is an irrevocable living trust that supplements the care and assistance that an individual receives from other sources. The trust must be irrevocable, however, for the state/federal government to recognize it as a special needs trust but if it is drafted properly, the assets held in the trust will not jeopardize the beneficiary’s eligibility for assistance.
- Charitable Trusts — There are several applications of irrevocable trusts in charitable planning. These trusts can be established during life or after death. Typically they are used to cause resources that might otherwise go to the government as taxes to instead go to a charitable cause. This could be an estate tax planning strategy but might even more likely be used in managing capital gains taxes. Irrevocable Charitable Trusts can be established to benefit both the charity and the donors family.
Contact a Raleigh, Durham Chapel Hill Trust Attorney
If you have additional questions or concerns regarding irrevocable living trusts, please contact a Chapel Hill, Durham, Raleigh area trust attorney at Clarity Legal Group by calling us at 919-484-0012 or contact us online.
With more than 30 years’ experience in private practice, Mark Costley has helped hundreds of North Carolinians with estate planning, living trusts, financial law, probate, and trust administration. Mark’s work involves elements of teaching, strategic analysis and planning, documentation, and assisting clients in implementing their plans Read More!
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