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Protecting Gifts with an Irrevocable Trust
March 30, 2021
Seniors who want to pass on assets during their lifetimes may be tempted to gift assets to their children or family members, outright, free of trust. However, establishing an irrevocable trust through which gifts are made for the benefit of their children can better protect those gifts from loss or dissipation during the Seniors lifetime in the event of needed family support.
A trust is a legal entity under which one person — the “trustee” — holds legal title to property for the benefit of others — the “beneficiaries” who hold equitable title. The trustee must follow the rules provided in the trust instrument. An “irrevocable” trust cannot be changed after it has been created. In many cases, trust income is payable to the “grantor” (the person who funds the trust, also commonly known as the “trustmaker” or “settlor”) for life, but not the principal. Upon the death of the grantor, the trustee makes final distribution of the remaining trust principal to the beneficiaries, usually the children. This way, the funds in the trust are protected during the life of the grantor from creditors while allowing the grantor to retain the income from the assets for living expenses.
Gifting assets outright can have unintended consequences, whereas establishing an irrevocable trust in which to make gifts has many advantages instead:
- Income. Putting assets in a trust means the grantor can receive income from the assets to continue to pay for living expenses. Depending on how the trust is set up, the grantor can receive regular income payments or the trustee could have discretion to make payments.
- Control. The grantor can retain certain rights over trust assets and personnel. For instance, the grantor chooses the trustees and can retain the power to remove and appoint new trustees. The grantor establishes the rules of the trust from the beginning. The grantor can also retain the right to appoint or change beneficiaries by designation in the grantor’s will.
- Asset protection from creditors. If money is given outright to a family member directly, that money could be lost to the recipient’s carelessness, creditors, or divorce. Gifting money to an irrevocable will help protect those assets from claims of creditors.
- Taxes. Trusts can protect the beneficiaries from capital gain taxes whereas gifting assets outright can create significant potential tax liabilities. For instance, assets that have gone up in value will receive a “step-up” in basis on the death of the grantor, which means the beneficiaries will pay less or no capital gains taxes. Assets that are gifted do not receive a “step-up.”
- Medicaid. If it is anticipated the long-term care benefits will be needed in the future, then it is important to plan ahead. If money is gifted outright or to an irrevocable trust within five years (the “look-back period”) of applying for Medicaid, the grantor will face a period of ineligibility for Medicaid benefits. The actual period of ineligibility will depend on the amount gifted or transferred to the trust. However, after five years, the gifted money is protected and not counted against the applicant. Putting assets in a trust is an excellent way to plan for Medicaid in the future.
Estate planning can feel overwhelming for those who have never put together a plan or who haven’t reviewed theirs every three to five years as recommended. The good news is that with the help of a specialized lawyer, this process can go much more smoothly and efficiently than many anticipate. In that vein, we thought we would share a general checklist that we send to our clients who are preparing to create or update an estate plan. Essential Components of an Estate Plan Beneficiary Designations Make sure you name a beneficiary for all non-probate assets, including 401(k)s, IRAs, life insurance policies, pensions, and bank accounts. For those who already have an estate plan, it’s important to ensure that the person currently named is still the person you want to be the beneficiary. Financial Power of Attorney Choose someone you trust who can make financial decisions for you in the event you are unable to do so. Advanced Healthcare Directive Ensure your medical preferences are followed using a living will. In addition, you’ll want to name a trustworthy friend or family member (often a spouse, parent, or child) as your medical power of attorney. This person will make medical decisions for you in the event you are unable to do so. Name a Digital Executor In this day and age, it’s wise to name a digital executor. This person can follow instructions you leave regarding all of your digital assets, such as bank accounts, social media, digital files, photos, and online storage. Proof of Identity Make sure all of these documents, including your marriage license/divorce certificates, Social Security card, and prenuptial agreements, are in one place and easy to locate. Property Deeds and Titles Confirm that all deeds and titles are up to date and in an easy-to-locate place–and if you’ve established a trust, make sure to retitle your property to list the trust as the owner. Funeral Instructions Make a list of your preferences regarding your funeral and place it with your will and other important documents. List your preferences, such as whether or not you wish to be cremated, a passage you want someone to read, or a list of preferred charities for donations. Insurance Information Gather all of your policies and make sure your executor knows where they are and what to do with the information. While this is not an exhaustive checklist, it’s a good jumping-off point to work from in consultation with an estate planning professional. Estate planning is not something people love to talk about, but it is important that it is done–and done right. Common Estate Planning Mistakes to Avoid Failing to Include Power of Attorney A power of attorney names someone you trust who can act in your stead should you become medically incapable of making important financial, legal, and/or medical decisions. Misunderstanding Your Estate Plan It’s critical you take the time to read through and understand the plan, what it entails, and what will happen when it is put in motion. Forgetting to Update It as Circumstances Change Our lives evolve constantly, and it’s important that your estate plan reflects changes. We have dealt with estates where assets and money were left to ex-spouses or deceased family members. Additionally, we have seen feelings hurt by a family member who was left out of the document because they married into – or were adopted into – the family after the plan was created. It is vitally important that you revise your plan at least every five years to make sure your wishes are reflected and followed. Failing to Fund Revocable Trusts Many estate plans include a revocable trust. Assets owned by the trust are protected from being tied up in probate court. Your attorney will draw up the appropriate paperwork, but you will need to transfer the relevant assets to the trust. For example, your house will need to be owned by the trust and not by you individually. Many clients fail to realize this and skip this important step, negating the work they did in creating the trust in the first place. Conclusion Estate planning is a crucial step in ensuring that your assets are managed and distributed according to your wishes. At Jurist Law, we are here to guide you through the process, making it as straightforward and stress-free as possible. To learn more about estate planning and to get your questions answered, attend our upcoming event. Our experienced lawyers will provide valuable insights and help you take the first step towards securing your legacy.
It’s never too late to save money. If, however, you wanted to save 100% of your money, you should have started planning five years before you needed Medicaid (through a Medicaid asset protection trust). You can give assets away, but any assets you give are counted for five years against you for Medicaid purposes. Most of my clients who come to me who haven’t done any sort of pre-Medicaid planning, nor have they set aside assets. The rule of thumb is that if you’re married and the first spouse needs to go into a nursing home, I can save 100% of your money—at least nine out of ten times. If your resources are vast, let’s say over half a million, then you may not be able to save all of it, but we can help you save most of it. Most of my clients are not worth more than half a million dollars, which is why they’re looking for Medicaid. If you’re not married and you’re single, I can still save half of your estate at that time, assuming it’s not over $500,000. Even without proper planning, you can always make gifts after you’re in a nursing home to protect assets and give assets to children while you’re still qualifying for Medicaid. So, it’s never too late; the worst you can save is half, but you might be able to save 100% of your resources if you plan ahead. What Are Some of the Biggest Mistakes That You’ve Seen People Make When It Comes to Elder Care Planning or Medicaid Planning? What Could They Have Done Differently With Your Assistance? First of all, one of the biggest mistakes that I see is people having a revocable living trust, which preserves assets from having to go to probate but does no Medicaid planning for them. Instead, I would advise them to look at protecting their home, and there are a number of ways to do that. We can protect the home through what we call a life estate deed or maybe with a Medicaid residential trust, which protects the home long-term from having to be liquidated to pay for a nursing home bill after your death. It will also take the home off the table so that if you sell it while you’re in a nursing home, it doesn’t disqualify you and protects the proceeds. Another mistake I see is parents deeding their house to their children outright. That’s a terrible mistake for a number of reasons. First of all, it counts against them for five years, which becomes an issue if you need Medicaid within that five-year period. There are also a number of problems that come with deeding your house to someone, the most obvious being that the house is not yours anymore. If your child gets sued by a creditor or they get divorced or whatever, your home is now subject to their creditors, and you might have to move out. Let’s say you did deed your home to your children five years before you need Medicaid; when you pass away, if your children decide to sell the house, they’ll have to pay capital gains on that sale for whatever you paid. So, that’s not a good option. Instead, I recommend putting your house in a trust that will preserve your tax exclusions upon your death and make it to where your children don’t have to pay taxes. It would take it off the table for Medicaid planning in advance, and it would also preserve the proceeds if you sell it while you’re in a nursing home. I see these two mistakes—relying on a revocable living trust for Medicaid planning and deeding your house to your children—on a regular basis. There are better ways to plan for Medicaid.