An Introduction to Irrevocable Trusts

Many people are interested in adding a trust to their estate plan but do not know what type of trust may be appropriate for them. There are two main types of trusts, Revocable and Irrevocable. Each has its own unique benefits and each is appropriate for specific situations. An estate planning attorney can help guide you in your search to find which trust is right for you.

As discussed in a prior post, a Revocable Trust, often called a Revocable Living Trust, is a flexible estate planning tool. As such a Grantor can revoke or amend this trust at any time. A Revocable Trust avoids the time and expense of a probate proceeding, avoids the need for multiple probate proceedings should you own property in more than one state and prevents court interference at incapacity. Additionally, a Revocable Trust is more difficult to contest than a Will and can include tax planning to reduce state and federal estate taxes. However, a Revocable Trust does not offer asset protection against creditors and therefore does not assist with Medicaid Planning. Refer to my Blog “Is a Revocable Trust for You” posted on October 15, 2022, for further details.

In contrast, Irrevocable Trusts are one of the strongest tools for asset protection, especially in relation to Medicaid. Such trusts are called Medicaid Asset Protection Trusts (MAPT). Any asset placed into an Irrevocable Trust will assist in making a person Medicaid eligible, as long as the requisite look back period has been met. Placing your primary residence into an Irrevocable Trust will protect it from a possible future Medicaid lien. Many know that the look back period for nursing home care is 5 years. However, in January 2023, there will be a new 2 ½ year look back period set into place for in home care (also called community care). If a person plans ahead and has property placed into a Medicaid Asset Protection Trust, they can meet that look back period and save themselves from a mandatory spend down of assets when it is time to become Medicaid eligible.

In order for an Irrevocable Trust to protect assets it must be drafted in a certain way. First the Grantor must not be named as the Trustee. Second, the Grantor must not have the ability to amend the trust. Third, the Grantor must not have access to the principal of the trust assets. Due to its lack of flexibility many people fear entering into an Irrevocable Trust because they believe that they will lose complete control over their assets. However, a Grantor of an Irrevocable Trust retains a certain level of control over the assets, including the following two very important powers. First a Grantor retains the right to replace a Trustee at any time and for any reason. Second, a Grantor retains a limited power of appointment. This limited power of appointment allows a Grantor to change the beneficiaries of the trust or change the percentages that each beneficiary ultimately receives from the trust estate.

This limited power of appointment is a very important right that a Grantor has, not only because it allows a Grantor to change his mind as to who will be the beneficiaries, but it also shows the Grantor has retained an “incident of control” over the assets. This retention of control is what allows property in the trust to get a step-up in basis at death. If the Grantor had made a completed gift and not kept this “incident of control”, then the basis of the asset would not step up at death and would lead to adverse income and capital gains tax consequences for the beneficiary. In addition, simply gifting assets to a beneficiary, rather than transferring to an Irrevocable Trust, could possibly expose those assets to risks such as divorce, bankruptcy, creditors, lawsuits, gambling and alcoholism.

Similarly, an Irrevocable Trust is not as rigid as most people believe because while a Grantor cannot touch the principal of the trust, the Grantor can receive all of the income that property in the trust produces (such as rent, interest and dividends). The income is passed through to the Grantor and taxed at the Grantor’s personal tax rate.

More importantly, any real property placed into an Irrevocable Trust can be sold by the trust. The proceeds can then be used by the Trustee to purchase replacement property or, if the Grantor chooses, the proceeds from the sale can be invested in stocks in order to produce additional income that can then be utilized by the Grantor during the Grantor’s lifetime. Either way the replacement property or the purchased stocks remain in the trust and therefore are still protected for Medicaid planning purposes.

A Medicaid Asset Protection Trust offers asset protection not only in relation to Medicaid, but with all creditors. Therefore, real property placed into an Irrevocable Trust cannot be mortgaged or refinanced. The majority of banks will not lend to a property that has been placed into an Irrevocable Trust as they fear that they will never be able to collect against the property should there be a default on the loan. In order to get a mortgage on the property, it would need to be removed from the Irrevocable Trust thereby re-starting the look back period if and when it is placed back into the trust.

To learn more about the differences between trusts and how an Irrevocable Trust can assist you in your long-term care and Medicaid planning please contact Mavros Panagos Law at 516-447-0455 or visit www.mavrospanagoslaw.com to schedule your free consultation.

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Eleni Mavros Panagos

Mavros Panagos Law

200 Broadhollow Road, Suite 207

Melville, New York 11747

(516) 447-0455

info@mavrospanagoslaw.com