One of the principal ways to protect your assets from being wiped out to pay for nursing home costs and uncovered medical expenses, avoid probate and reduce your estate and income taxes is to gradually place some of your assets into an Irrevocable Family Trust.
The purpose of this short letter is to give you a brief explanation of what an Irrevocable Family Trust is and how it can be used to accomplish many of your estate planning goals.
Hope this helps.
I. What is an Irrevocable Family Trust?
An Irrevocable Family Trust is an inter vivos trust (one you set up during your life) that is managed by Trustees (usually your children) for the benefit of the beneficiaries (usually your children and grandchildren). The Trust is called irrevocable because it cannot be amended or terminated by you, the grantor alone, once you set it up.
It should be noted that while the grantor (you) cannot revoke the trust by yourself, New York law (EPTL Sec. 7-1.9) allows an Irrevocable Family Trust to be amended if the grantor (you) and the beneficiaries of the trust (usually your children) agree to the amendment. So while the Trust is "Irrevocable," it can be amended by your and with the consent of your children at any time.
Also a provision can be added called a limited power of appointment, that would allow you alone to cut out any beneficiary, usually a child or grandchild that you wished to cut out at any time. For example, if a child behaves in a way that upsets you or a grandchild got into drug or alcohol abuse or estranged themselves from the family, you could eliminate them as a beneficiary or reduce their interest in the trust if you wanted to without anyone's consent. This gives you tremendous power over the trust even though it is irrevocable.
II. Why use an Irrevocable Family Trust in Estate Planning?
A. In essence, the benefits of using an Irrevocable Family Trust are the same as those that apply to making outright gifts of money, securities or other property to your family beneficiaries. Gifts in trust, however, have certain advantages over outright gifts to your children and grandchildren.
B. A principal benefit for making a gift in trust is to protect your assets from nursing home expenses or uncovered medical expenses. They can also be used to help you (the grantor) or the beneficiary qualify for Medicaid by preventing the assets you place in the trust from being considered an "available resource" for Medicaid purposes.
C. If you make gifts outright to your children and they spend the money, that money is not available to you to meet expenses you may have, like making major repairs to your home or paying real estate taxes or insurance on your home.
D. If you place your home or assets in your child's name, your child:
a) You may have a bad relationship now or in the future with:
1. your child or
2. your son-in-law or daughter-in-law
b) Your child may:
1. get divorced or pass away.
Note: If your child gets divorced or passes away, your assets may end up going to your son-in-law or
daughter-in-law and not your grandchildren.
2. have creditors or go bankrupt resulting in liens being placed against your house or other assets transferred
to your child.
3. invest your assets unwisely
4. spend all of your assets during your life
5. spend all of your assets as soon as you die.
A trust can avoid all of the problems created by the above situations
E. The trust also provides investment management and protection for the assets you (the grantor) transfer into the trust and
protection for the beneficiary of the trust.
1. The grantor sets up the irrevocable trust and transfers the family home, money, securities or other property to the trust that generate income. These assets are then managed by the trustee or trustees. The trustee or trustees then either accumulates the income until the grantor's death or pays the income of the trust to or for the benefit of the beneficiary or beneficiaries of the trust that are chosen by the grantor in the trust agreement, usually children or grandchildren.
2. The trust can be paid out at the grantor's death, the second to die of you or your spouse or stay in the trust for the life of the beneficiary, and at his or her death, the trust assets can then pass to whoever is designated in the trust to receive the assets, usually the children or grandchildren, who are referred to as the "the remaindermen."
3. Alternatively, the trust can be distributed to the children or grandchildren during their lives at certain ages such as 1/3 at 21, 1/3 at 25 and 1/3 at 30, etc. There is no magic age or fraction, but many grantors feel that they want to provide economic security for their families for their lifetime and part of that involves allowing only limited access to the trust funds during the child or grandchild's youth and distribution of the funds over a period of time to insure that the money placed in the trust will be available for the beneficiary's use and support and not spent all at once by the beneficiary. This protects the beneficiary from their own lack of sophistication, judgment, credit problems or possible divorce situations.
4. Many times, after the death of the grantor, the trustees are given discretion to distribute the money sooner than the ages selected by the grantor if the trustee decides the beneficiary needs the money sooner for a good reason such as the support, education, health of the beneficiary or use by the beneficiary in purchasing a personal residence, starting a business or in case of a financial emergency.
5. The trust can avoid your assets passing to your son-in-law or daughter-in-law, should your son or daughter pass away, thus preventing your son-in-law or daughter-in-law from disinheriting your grandchildren, spending all of your assets or leaving your assets to their next spouse. This is done by the trust automatically setting up a grandchild's trust for the children of any child of yours that passes away during your life. This keeps your assets in your family bloodline so they pass to your grandchildren through the trust if your child passes away before you do.
D. Other benefits of using an irrevocable trust include:
1. Investment management.
2. Shifting income to lower tax bracket beneficiaries.
3. Keeping property (including life insurance) out of a grantor's estate for estate tax purposes, thereby reducing the grantor's estate taxes on death.
4. Removing appreciation and income from the assets transferred from the grantor's estate, thus reducing estate taxes on that appreciation and income.
5. Keeping property out of the grantor's estate for probate purposes, thereby eliminating the legal fees, costs and delays involved in the probate of that property.
6. Keeping the property, appreciation and income on the property out of a beneficiary's estate for probate purposes and estate tax purposes, thereby reducing the beneficiary's probate costs and estate taxes.
7. Protecting beneficiaries from their creditors and spouses by using a spendthrift clause. (New York trusts are automatically spendthrift as to the income interest.)
8. Protecting the assets for your beneficiaries, in the your beneficiary is on Medicaid or SSI.\
9. Allowing you to both protect your home from nursing home expenses and still get tax free treatment under IRC Section 121 if you sell your home during your lifetime.
E. Trust beneficiaries can include:
1. your spouse, children, grandchildren, brothers, sisters, nieces, nephews, friends, charities, mom or dad, etc.
3. beneficiaries with special needs so they don't lose their SSI or Medicaid.
4. beneficiaries that are unable to handle money, are in the middle of divorce or a bad marriage, have judgments
or tax liens against them, are in bankruptcy, etc.
While this is certainly not an all inclusive treatment of the subject, I hope this short discussion will take some of the mystery out of the use of irrevocable trusts for estate planning.
I offer a free office conference to discuss how an Irrevocable Family Trust might be used by you to accomplish your estate planning goals.
Warmest personal regards,
Elder Law, Trust and Estate and Tax Sections of the New York State Bar Association
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