You may assume that you would not be able to access assets that you convey into a trust because the whole idea is to create separation. This is true to some extent, but there are different types of trusts, and we will provide an explanation in this post.
The notion that you cannot reach assets in a trust stems from the fact that there are irrevocable trusts. Though there are very limited exceptions, you cannot dissolve the trust, and you cannot act as the trustee if you establish this type of trust.
Since you are not the trustee, you do not have direct access to the assets in the trust, but this can be a good thing.
High net worth individuals have to be concerned about the potential ravages of the federal estate tax and its 40 percent rate. It is applicable on the portion of an estate that exceeds the exclusion, and in 2021, it is $11.7 million.
Here in New York where we practice, there is a state-level estate tax with a $5.93 million exclusion this year.
If you are exposed to either or both of these taxes, you can use an irrevocable trust, or multiple irrevocable trusts, to gain estate tax efficiency. The assets in the trust would not be part of your taxable estate, and these trusts facilitate discounted transfers to the beneficiaries.
Another reason why people use living trusts is to gain eligibility for Medicaid. Medicare does not cover a stay in a nursing home, but Medicaid will pick up the tab if you can qualify.
Since the program is only available to people with limited monetary resources, there is a $15,900 asset limit in New York. In an effort to create a financial profile that will lead to eligibility, you could convey assets into an irrevocable trust.
They would not count if you apply for Medicaid as long as you fund the trust at least 60 months before you submit your application. While you are living independently, you would be able to accept distributions of the trust’s earnings.
There are other types of irrevocable trusts that are utilized in the field of estate planning, and we will look at them at another time.
Revocable Living Trust
There is a type of trust that you can revoke called the living trust. When you establish this type of trust, you can in fact act as the trustee.
You retain incidents of ownership in a legal sense, so the assets would count if you apply for Medicaid, and they would be part of your taxable estate. If you are sued, the assets in the living trust would not be protected from the plaintiff.
What will a living trust accomplish? When you have a living trust, you can include spendthrift protections. The beneficiary would not have access to the principal after your death, and the assets would be protected from their creditors.
You are not required to provide lump sum inheritances all at once. If you want to include spending safeguards, you can spread them out over time, and the trust can remain active for up to 21 years.
Another benefit is the simplified, streamlined estate administration. When a will is used as an asset transfer vehicle, the executor will admit it to probate. This is a time-consuming and costly legal process, and the records are available to anyone that wants to pry into your affairs.
On the other hand, if you have a living trust, the trustee would distribute assets to the beneficiaries after your death outside of probate. As a result, the drawbacks would be avoided.
We Are Here to Help!
Our doors are open if you are ready to work with a Smithtown, New York estate planning lawyer to develop a plan. As you can see, there are different approaches that can be taken, and the right way to proceed will depend on the circumstances.
Personalized attention is important, and this is what you receive when you choose our firm.
You can schedule a consultation appointment if you call us at 631-265-0599, and you can use our contact form if you would rather send us a message.