There are trusts that you can revoke, and there are also irrevocable trusts. When you hear this for the first time, you may wonder why you would establish a trust that you cannot revoke if you have an alternative. We will answer the question in this post.
Incidents of Ownership
If you have certain objectives, you can benefit if you remove assets from your name. In a legal sense, this is called surrendering incidents of ownership.
People that are exposed to estate taxes use these trusts to gain tax efficiency. On the federal level, the exclusion is $11.7 million. This is the amount that can be transferred tax-free, and the remainder would potentially be subject to the estate tax.
New York is one of 12 states in the union with a state-level estate tax. The state exclusion is $5.93 million in 2021.
There is also the federal gift tax that is unified with the estate tax, so you cannot give gifts to avoid the tax. While there is no New York gift tax, there is a three-year “clawback” provision. Large gifts that you give within three years of your passing are considered to be part of your taxable estate.
Assets that have been conveyed into an irrevocable trust are no longer part of your estate, and this is why these trusts are used to gain estate tax efficiency. They facilitate transfers to a beneficiary at a tax discount, and there are different trusts that work in different ways.
Most senior citizens will need help with their activities of daily living at some point in time, and over 30 percent of elders will eventually reside in nursing homes. In New York City, you can expect to pay about $180,000 for a year in a nursing home, and this is the average length of stay.
You may assume that Medicare will pay for long-term care since the program exists to satisfy the healthcare needs of seniors. Whether it is fair or not, Medicare does not cover the custodial care that nursing homes provide.
Medicaid will pick up the tab if you can gain eligibility, but you are probably aware of the fact that it is a need-based program. You cannot qualify if you have more than $15,900 in countable assets in your name.
Some assets don’t count, including your home with an equity limit $906,000 this year. This is a subject worth covering in detail, and we will do so in a future blog post.
To qualify for Medicaid to pay for long-term care, you could convey assets into an irrevocable, income-only Medicaid trust. You would not be able to act as the trustee, and you would not have access to the principal.
However, you would be able to continue to receive income that is generated by assets in the trust until you apply for Medicaid. As long as you fund the trust at least five years before you submit your application, the assets would not count.
Special Needs Planning
Many people with disabilities rely on Medicaid and Supplemental Security Income because they have significant levels of financial need. An improvement in financial status could potentially cause a loss of benefit eligibility.
As a response, if you want to leave an inheritance to someone with a disability that is enrolled in these programs, you could make them the beneficiary of a supplemental needs trust. This would be an irrevocable trust, and the trust would be administered by a trustee that you choose.
The trustee would be able to use the assets in the trust to make the beneficiary more comfortable in many different ways. Benefit eligibility would remain intact as long as the rules are followed correctly.
After the death of the first beneficiary, the successor that you designate in the trust declaration would become the active beneficiary of the trust.
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If you are ready to work with a New York City estate planning attorney to put a plan in place, we are here to help. You can send us a message to request a consultation appointment, and we can be reached by phone at 212-973-0100.