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Indeed, an irrevocable trust cannot be revoked or changed under most circumstances, and you cannot act as the trustee if you establish this type of trust. You surrender incidents of ownership in a legal context when you create an irrevocable trust, and this can be beneficial.
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Very high net worth individuals have to be concerned about the federal estate tax because it carries a heavy-handed 40 percent top rate. Assets that are held by an irrevocable trust would not be part of your estate, so these trusts are used by people that have this concern. One of them is the generation-skipping trust. If you establish this type of trust, your grandchildren would be the ultimate beneficiaries. After your passing, your children would be able to accept distributions of the trust’s earnings and use property that is held by the trust. However, the property would never be transferred to them, so the estate tax would not be levied. After the death of your children, your grandchildren would inherit the assets. The estate tax would be a factor at that time, but there would be just one round of taxation over two generations. Another commonly used estate tax efficiency trust is the qualified personal residence trust. To implement this strategy, you convey your home into the trust, and you name a beneficiary and a trustee. You establish a term during which you will continue to live in the home as usual; this is called the retained income period. When you transfer the home into the trust, it is no longer part of your estate for tax purposes. There is a gift tax that is unified with the estate tax, so the transfer of the home to your beneficiary would be taxable act of gift giving. That’s the bad news, but the good news is that the value of the gift would be far less than the actual value of the home. The IRS would determine the taxable value in light of the fact that the beneficiary would not assume ownership of the home for a number of years. No one would pay full price for a home under those circumstances, so the taxable value would be lower than the true value. These are a couple of the irrevocable trusts that are used for tax efficiency purposes, and there are a number of others.
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An irrevocable trust can be used by anyone that is interested in nursing home asset protection. The majority of senior citizens will need some type of paid long-term care eventually, and just over one third will reside in nursing homes. You can expect to pay $100,000 or more for a year in a nursing facility in the Hilton Head area, so we are talking about some big numbers. The average length of stay is one year, but 13 percent of people that need professional long-term care receive the assistance for more than five years. Medicare does not pay for the custodial care that nursing homes and in-home health aides provide. Medicaid will cover the cost if you can gain eligibility, but there is a $2000 limit on countable assets. If you convey resources into an irrevocable, income only trust, the principal would not count if you apply for Medicaid. The “income only” designation is key because you could accept distributions of the trust income while you are living independently. Advance planning is essential, because there is a five-year look back period. You are ineligible for a period of 60 months after you transfer assets out of your name.
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Schedule a Consultation Today!
As you can see, there are a lot of things to think about, and there are multiple tools in the estate planning toolkit. When you work with an attorney from our firm, we will make recommendations based on the circumstances so you can make informed decisions.
At the end of the process, you will walk away with a custom crafted plan that ideally suits your needs. If you are ready to get started, you can schedule a consultation at our Bluffton, SC estate planning office if you call us at 843-815-8580, and you can use our contact form to send us a message.
