In a previous post we discussed the advantages and draw backs of Revocable Living Trusts.  While there are many significant advantages to Revocable Living Trusts, there is one significant disadvantage – they do not protect assets against legitimate creditors.  So, is there a tool that allows assets to be shielded from creditors?   Yes, the Irrevocable Trust.

Does an Irrevocable Trust Meet Your Goals?

Before we can explore the advantages and disadvantages of an Irrevocable Trust we must first explore whether or not it will fit your goals.  The main reason is that in the field of Elder Law, establishing an Irrevocable Trust is typically meant to preserve assets, like your home or money, against nursing homes and Medicaid recovery.  Nursing homes are extraordinarily expensive. It is not uncommon to be charged anywhere from $9,000 to $22,000 a month for nursing home services.  If you had to privately pay at those rates, you may not have the means to do so for very long.  Therefore, many look to the government to pay the fees of such long term care services.  The government program that pays for such services is Medicaid.

Medicaid is not like most creditors, however, because they have their own recovery laws.  The most notable is that they are a “Super Creditor”, meaning they have priority over other creditors.  Also, they are entitled to be reimbursed from the Medicaid recipient’s probateable estate upon the recipient’s death for the long term care services they provided.  A typical asset that is passed on in probate is the recipient’s primary residence.  So, the fear that the government will “take” your home is actually quite founded.

Medicaid Qualifications

Before you even get to the Medicaid recovery stage you have to be eligible for the Medicaid program.  Medicaid can be equated to a country club. You must be accepted as an eligible member before you are entitled to receive benefits, but not everyone qualifies.

The first threshold, of course, is that you are disabled enough to warrant long term care.  Most people looking into the program meet that threshold.  The second threshold is that as of 2018 you must have resources below $15,450.00.   On first blush most people do not meet this threshold, but there are several options available to make the threshold attainable.  One option is to give your money away to meet the threshold level.  While this method is acceptable for Community Medicaid (where you receive long term care services by a personal care aide in your home), it is not acceptable for Chronic Care Medicaid (where you receive long term care services from a nursing home) unless the transfer was between spouses or to a disabled child.  If the transfer was not to a spouse or a disabled child, Medicaid will reject your application because they will assume you gave away the money to become eligible for the Medicaid program. Medicaid is entitled to look back through 5 years of your financial records and if they see any transfers of assets without consideration (receiving some value back for the transfer), they will penalize you.  The penalty is that they will refuse to pay for your nursing home care for 1 month for approximately every $13,000.00 of uncompensated transfers you made during the 5 year look-back period.  This is why it is extremely important to pre-plan to preserve assets at least 5 years in advance of ever needing nursing home care.

The most risk free and tax advantageous place to park assets while you wait out the 5 year look back period is in an Irrevocable Trust.  To obtain these advantages, you must “give up” ownership of the asset(s) you want to preserve.  However, a properly designed estate plan will minimize any effects of giving up ownership.

Advantages of Irrevocable Trusts

One of the largest advantages of a properly drafted Irrevocable Trust is that it will preserve assets from creditors.  Assets in the Trust will not be available to your creditors or the creditors of your Trustee. The Trustee of an Irrevocable Trust is typically your child.  Your child is not the owner of the Trust assets and, therefore, even if your child-Trustee gets divorced, your Trust assets are not part of your child’s marital property.

While giving up ownership may sound frightening to you, a properly drafted Irrevocable Trust will actually grant you certain rights that keep you in control of the assets put into the Trust.  The way to maintain some decision making and control over your assets is to have the Trust drafted so that it grants you the ability to have control over your Trustee. In other words, if your child listens to what you ask of him, you will have some decision making and control.  Even if he does not listen, however, the Trust should be drafted to grant you the right to fire him and put a different Trustee in place that will do what you wish.  Moreover, your Trustee will not have the right to kick you out of your home and you will still retain your Enhanced STAR real estate taxes.

Another advantage of placing your home in an Irrevocable Trust, as opposed to gifting it outright to your children, is that upon your death your children receive a step up in the basis of your home from the value you purchased it at to the value of the home on your date of death. What does that mean? It means your children will not have to pay capital gains tax  if  they sell the home soon after your passing.

Finally, if you fund the Trust with money, you and your spouse will have the advantage of being entitled to withdraw the income that the money in the Trust generates.   After 5 years has elapsed from the funding of the Trust, anything the Trust holds will be unavailable to Medicaid recovery.   Other advantages of the Irrevocable Trust are that they avoid probate and, consequently, probate attorney fees.

Disadvantages of Irrevocable Trusts

The main disadvantage of the Irrevocable Trust is that you cannot take any of the principal out of the Trust.  That is why a lot of time should be spent discussing what exactly should be placed in the Trust in the first place.  If you believe that you will never need the equity from your home, like a reverse mortgage or a line of credit, nor will you ever need to live on the sale proceeds from your home, your home is an excellent asset to place in the Irrevocable Trust.

While we cannot possibly cover all of the issues revolving around Irrevocable Trusts within the confines of this newsletter, we always welcome you to a complimentary consultation so that we can discuss your specific situation and determine whether or not an Irrevocable Trust is right for you.