Sometimes people hear estate planning terms, and because they do not know much about the subject, they make assumptions that seem logical. However, in reality, they trip over themselves to some extent because they have not done enough research.
If someone was to ask you if you would like to use a revocable trust or an irrevocable trust, you may automatically prefer a revocable trust, because it sounds “safer.” The idea would be that you get all the benefits that you would get with any trust, but you also have the ability to change your mind, dissolve the trust, and take back the assets.
In reality, this is not the best way to frame the difference between the two. There are some estate planning objectives that could not be accomplished through the utilization of a revocable living trust. This is because of the fact that you retain incidents of ownership, which is something that seems so appealing on the surface.
Indeed, you can revoke this type of trust, and you can also act as the trustee and the beneficiary while you are living. Most people who create revocable living trusts do assume these roles.
You would be creating the trust as an estate planning tool, so you have to address the way that your assets will be passed along after you are gone. In the trust declaration you name successor beneficiaries to receive monetary distributions after your passing, and you name a successor trustee.
One of the major benefits that you get with a revocable living trust is the ability to add spendthrift protections. You can allow the successor trustee to manage the assets that have been conveyed into the trust, and you can instruct the trustee to distribute assets in any way that you would like to.
Many people do not want to allow for lump sum distributions of everything in the trust right after they pass away. You could include a spendthrift provision when you create a revocable trust. So, the trustee would manage the assets, but the trust would become irrevocable after you pass away. As a result, the assets in the trust would be protected from the beneficiary’s creditors as long as they remain in the trust.
If certain legal language is used when the trust is created, a certain amount could potentially be distributed to the beneficiaries to provide basic maintenance, and these assets would be protected as well.
Now we can look at some of the reasons why you may want to eschew the “safety” that you may think you are getting if you create a revocable living trust.
High net worth individuals can be exposed to estate taxes. There is an estate tax on the federal level, and here in New York, we also have a state-level estate tax. If you have significant assets in a revocable trust, they would be part of your estate for tax purposes.
There are irrevocable trusts that people use to gain estate tax efficiency; that is a much safer route for people who face death tax exposure.
Medicaid planning is another example. Many senior citizens attempt to gain Medicaid eligibility, because Medicaid pays for long-term care. Most seniors will need living assistance, and Medicare does not pay for it.
Because of the fact that Medicaid is a need-based program, you cannot gain eligibility if you have countable assets in your possession that exceed $2000 in value. Since you are retaining incidents of ownership when you have a revocable trust, the assets that you have in the trust would be counted if you were to apply for Medicaid.
Since nursing home care can cost well over $100,000 per year, the assets in the trust would be anything but safe.
People who want to preserve resources for the benefit of their loved ones safely convey assets into an irrevocable Medicaid trust. Assets that you convey into this type of trust would not be counted if you were to apply for Medicaid to pay for long-term care. They would wind up in the hands of your children after your passing.
However, you could continue to receive income that is earned by the trust before you apply for Medicaid to pay for long-term care.
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As you can see, you can get the wrong idea if you make assumptions with regard to estate planning tools. Our firm can help if you would like to get straight facts from a reliable source.
To set up a consultation, call us at (631) 265-0599 or send us a message through our contact page.
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