Know the Difference Between Irrevocable and Revocable Trusts for Planning
In dealing with Medicaid structuring and estate planning, I am often asked whether a trust could be the answer. Trusts are not an easy subject to understand. There are different kinds and the laws and regulations keep changing. Even when we have the right answers, Congress or a state legislature or a Court decision may disrupt everything and it is time to start over again.
Here are some general ideas to navigate the difficult subject of trusts.
Revocable vs. Irrevocable Trusts. A revocable trust, as the name suggests, can be changed by the person (the “Settlor” or Trust Maker) who made it. After drafting, executing and funding the trust, the Trust Maker can change his or her mind about the terms or discontinue the trust entirely. Because the trust can be changed, for tax purposes and for many other purposes, a revocable trust is treated generally as though the Settlor did not give the assets away in the first place.
A revocable trust does not save federal estate taxes unless it is drafted with the same kind of language and terms that would be used in a Will and, besides, at the 2013 estate tax rate with a $5,250,000 unified credit ($10,500,000 for married couples leaving assets to the next generation), few people pay federal estate taxes now anyway. For long term care, assets are still considered available, so revocable living trusts do not help for Medicaid planning.
There are still some reasons why in the appropriate case to use a revocable living trust.
One is to have a mechanism in place that can manage and continue when one or both of the Trust Makers become disabled especially if the Makers may move to other states. Note, however, that some of this might be done with well drafted Wills and Powers of Attorney.
Even where people appoint themselves as Trustees of their own Living Trust, such as Mary and Thomas Jones, Trustees of the Jones Family Trust, with their grown children or a financial institution as Successor Trustees, working on the drafting of such an engagement might force them to think through what they really want. Facilitating transfer of real estate in different states can be another goal.
Assets need to be transferred into the name of the trust. Setting up a living trust without putting anything into it is like constructing a box without depositing anything into it. Living trusts only work well with a good plan.
An Irrevocable Trust, on the other hand, is one that, once established and funded, cannot be changed. Setting up an Irrevocable Trust is a lot like giving the assets away and is similarly treated for tax and other purposes.
Here are some reasons for establishing an Irrevocable Trust.
Creditor Protection – If assets are given away directly, they may be subject to the claims of creditors or potential creditors of the trust beneficiaries. Giving the assets to a trust, if properly done, can in some cases, insulate the assets from claims against the trust beneficiaries and preserve available funds.
Tax Structuring – Some irrevocable trusts such as those gifting through a trust to minors either generally or for specific purposes and specialized trusts benefiting charities may have significant tax benefits.
Irrevocable Income Only Trusts – These trusts may be used in connection with Medicaid structuring and have various names. Sometimes referred to as a Medicaid Intentionally Defective Grantor Trust (MIDGT) or an IOT, generally they should be considered only where there are enough assets or resources in addition to those being placed in trust to carry the Trust Maker through five years of
nursing home care. It is assumed in settling up the trust that the Trust Maker will initially be paying for his or her own care. The MIDGT is to protect additional assets when there is longer term care over five years.
Long term care insurance can be combined with a MIDGT especially if it can carry through five years.
There are other successful strategies to deal with Medicaid and the five year lookback than Trusts. One of them should not be to transfer all the assets out of the owner’s name and wait five years. This could have significant and catastrophic effect in some cases. The important point is to get professional advice when help is needed.
For more, listen to “50+ Planning Ahead” a weekly radio program on WCHE 1520 on every Wednesday from 4:30 pm to 5:00 pm with Janet Colliton, Colliton Law Assocs., PC, and Phil McFadden of Home Instead Senior Care.
About the Author Janet Colliton
Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.