Revocable or Irrevocable Trust: Which is Better for Me and My Family? (Part 2)

Irrevocable and Revocable Trusts are excellent estate and elder law planning tools that, depending on your objectives, can both be of significant value when used as part of your planning. Here we’ll take a closer look at the Irrevocable Trust and its most common uses and benefits.

Irrevocable Trust
There are various types of Irrevocable Trusts, each with differing purposes and objectives. For example, if you would like to gift assets during your lifetime for the benefit of your children and/or grandchildren, an Irrevocable Trust might be an appropriate vehicle. If you have a disabled child and/or grandchild an Irrevocable Special Needs Trust is often utilized. If you have significant life insurance assets and don’t want the assets to go outright to the beneficiary (and also don’t want the life insurance death benefit to be part of your taxable estate), an Irrevocable Life Insurance Trust is often utilized.

Perhaps the most common Irrevocable Trust utilized by seniors today is the Irrevocable Medicaid Asset Protection Trust (also referred to as an Irrevocable Income Only Trust). Unlike a Revocable Living Trust, this Irrevocable Trust cannot be amended and/or revoked by the creator, and neither the creator nor his or her spouse should be appointed as trustee of said trust.

The primary purpose of the Irrevocable Medicaid Asset Protection Trust is to shelter assets so that if one needs home care and/or nursing home care services in the future, the assets titled in the name of the trust are not counted as available resources for purposes of Medicaid eligibility and are not resources against which Medicaid has a claim and/or lien against for the value of the services they have provided.

The transfer of assets to the Irrevocable Trust will disqualify the creator of the trust and his or her spouse from eligibility for nursing home Medicaid (not Medicaid home care) for five years (known as “the look back period”). Once the five years have elapsed, however, the assets in the trust are no longer available resources for purposes of Medicaid eligibility and Medicaid cannot file a claim and/ or lien against the trust assets.

An Irrevocable Medicaid Asset Protection Trust is ideal for individuals wanting to protect their home and a portion of their life savings against the ravages of the cost of long-term care. With the average cost of a nursing home in the New York Metropolitan area being in excess of $15,000 per month, failing to do so can have dire consequences.

Unlike the Revocable Trust, an Irrevocable Trust does not allow the trustees to distribute the trust principal to or for the benefit of the creator(s). However, the trust creator(s) can receive any income generated by the trust assets and have the right to reside in and utilize any real property transferred to the trust during their lifetime. The trust creator will continue to be able to utilize any tax exemptions available such as STAR, Senior Citizen and Veterans, and can also take advantage of the personal residence exclusion for income tax purposes in the event the residence is sold.

Revocable or Irrevocable Trust: Which is Better for Me and My Family? (Part 1)

My clients are always asking me which is better – an Irrevocable Trust or a Revocable Living Trust. Much to their dismay, the answer is that one is not better than the other. Irrevocable and Revocable Trusts are excellent estate and elder law planning tools that, depending on your objectives, can both be of significant value when used as part of your planning.

Revocable Living Trust
A Revocable Living Trust is a trust agreement that is amendable and revocable during one’s lifetime. The creator(s) of the trust can be both the creator and the sole trustee, though alternate trustees can be appointed. This gives him or her full, unfettered control over the assets transferred to the trust during his or her lifetime. He or she can also specify to whom (and in what amounts/percentages) the assets titled in the trust are to be distributed to upon his or her demise.

At death of the creator(s), the Revocable Trust becomes irrevocable, and thus, the assets titled in the name of the trust will not be subjected to probate. The named trustees of the trust will be able to make payments of the decedent’s bills, taxes and expenses and make distributions to the named beneficiaries of the trust without the court intervention that would be required with the probate of a Last Will & Testament. In essence, the Revocable Trust can accomplish all that is accomplished with the use of a Last Will while avoiding the necessity of probate.

To effectively utilize a Revocable Trust, it is absolutely essential that one’s assets, such as bank accounts, stocks, bonds and real property (house, condo, co-op), must be titled (re-titled) in the name of the trust. The trust does not control assets that are not titled in its name.

The Revocable Living Trust is not the vehicle to utilize if your goal is to protect assets from the cost of long-term care (in home care and/or nursing home), however. The assets titled in the name of the trust will be considered available resources for purposes of Medicaid eligibility, and Medicaid can impose a lien/claim against these assets.

The primary reason for the use of a Revocable Living Trust remains the avoidance of the probate process and the associated legal fees, costs and delays. It also has the added advantage of allowing the alternate named trustees to manage the trust assets in the event the creator becomes incapacitated or disabled.

In my next entry I will outline the various purposes and objectives for utilizing an Irrevocable Trust.

What is the Difference Between Medicare and Medicaid in New York?

It is important to know the distinctions between Medicare and Medicaid. With more than 70 million “baby boomers” coming of age, a growing number are now asking the question. Here’s a brief explanation:

Medicare
Medicare is a program administered by the federal government that is available to persons who are sixty-five years of age and older, as well as certain disabled persons. Presently, Medicare provides health care for approximately 40 million elderly and disabled Americans. Since the passage of Title XVII of the Social Security Act in 1965, Medicare has basically been the health insurance component of Social Security. Medicare provides health insurance without any asset or income requirements.

There are three separate components of Medicare:

Medicare Part A – covers the costs of in-patient hospital care, home health care, hospice care and some “skilled” nursing care. The hospital care must be determined to have been medically necessary.

Medicare Part B - covers part of the cost of physician services and other medical services and supplies. For example, if an individual is hospitalized, the hospital bill would be covered by Part A; however, the patient’s physician services would be covered by Medicare Part B.

Medicare Part C (Medicare Plus Choice) - this portion of Medicare was enacted to provide those eligible for Medicare to have the option of having physicians’ services provided to them by various health care providers such as HMOs.

For purposes of nursing home planning, it is important to remember that Medicare only covers a maximum stay in a skilled nursing facility for one hundred days, if the admission to the nursing home is within thirty days of the hospital discharge. The patient must require skilled nursing or skilled rehabilitative services on a daily basis. Of said one hundred days, Medicare will cover the first twenty days in full, and for the next 80 days Medicare will pay everything except $109.50 per day. Medicare does not provide any coverage for custodial care, which is generally most of the care a nursing home patient receives. This is where the need for Medicaid eligibility is of importance.

Medicaid
Unlike Medicare, Medicaid, which was enacted in 1964 by Title XIX of the Social Security Act, is a “means tested” entitlement program that is jointly administered by the federal and state governments. As a “means tested” entitlement program, Medicaid has income a resource limits as a pre-condition to eligibility. In order to participate in the Medicaid program, in 1965 New York State enacted the enabling legislation to effectuate the availability of Medicaid in New York.

In addition to the income and resource requirements for eligibility for Medicaid, residency is an additional prerequisite to eligibility. For purposes of Medicaid eligibility, residency is defined as the location where the applicant has his permanent home. Generally, to be eligible for Medicaid in New York, an individual must be a resident of the state. Although New York has no durational residency requirement, physical presence within the state and the intent to remain are all critical factors in establishing residency. Also, while it is not necessary that one be a citizen, it is necessary that one be a legal resident.

Finally, to be eligible for Medicaid it is necessary that an individual be under the age of twenty-one or over the age of sixty-five. Those between the ages of twenty-one and sixty-five can become eligible for Medicaid only if they are blind, disabled, eligible for public assistance, or recipients of Supplemental Security Income.

Not All Powers of Attorney are Created Equal

When meeting with a client and his or her family, one of the first inquiries I make is to determine whether or not he or she has previously executed a durable general power of attorney (POA) and, if so, what provisions it contains. Since a POA is, like many legal documents, a standardized form created by statute, the natural tendency is to assume that they are all the same and contain identical provisions. This, however, is often an incorrect and dangerous assumption.

A POA is an extremely important document, especially if there are issues regarding one’s health and mental capacity, which allows an individual (the principal) to select an agent to handle his or her financial affairs. Obviously, the agent should be someone you have a great deal of trust and confidence in. For example, a married person will generally appoint his or her spouse as the agent and, if he or she is single, a child or children. More than one person can be appointed, and in many of instances two co-agents may be advisable.

If the POA is “durable” the agent will be able to act even if the principal is subsequently disabled or incapacitated. The actions an agent can undertake, however, are controlled by the explicit terms of the POA — making close examination of the document’s language necessary. For example, the agent’s ability to gift/transfer the assets of the principal to himself and/or others is in New York is only permitted if the POA specifically grants the agent the authority to do so.

It is not at all uncommon for a client to believe that he or she has executed a POA with broad gifting power. However, once the POA is closely examined, it is often revealed that the POA does not allow the agent to make gifts in amounts in excess of $14,000 per person per year.

The above stated limitation on gifting can have dire consequences if the principal becomes disabled/incapacitated and the agent needs to engage in asset protection planning and/or estate tax planning for the principal. The failure to include such broad gifting authority can result in the agent not being able to make the transfers necessary to make the principal eligible for Medicaid (home care and/or nursing home) and/or reduce potential estate tax liability of the principal.

If a sufficiently broad POA is not in existence, and the principal is no longer competent to execute a new POA, it may be necessary to have a guardian appointed by the court for the incapacitated person. This is an expensive and time consuming proceeding that can easily be avoided by signing a durable POA with broad gifting powers before such incapacitation occurs. It is also important to include any other powers deemed prudent beyond the statutory powers found on most POA forms.

For example, a broadly drafted POA could include language that permits the agent to create either a revocable and/or irrevocable trust on behalf of the principal. This is a power that can be of significant value for both estate planning and long-term care planning. The ability of the agent(s) of the POA to do virtually all that the principal could do if he or she were competent can result in many cases the savings of hundreds of thousands of dollars.

In conclusion, I urge you to closely examine the language contained in the POA you have executed to ensure that it is sufficiently broad. Additionally, if you have not executed a POA, I highly recommend you do so before it’s too late.

Do I Need an Attorney When Applying for Medicaid Nursing Home or Medicaid Home Care in New York?

Applying for Medicaid nursing home or home care is an extremely complex process – one with potential complications not often evident at first glance. The rules and regulations relevant to Medicaid eligibility also change frequently and vary by state. Securing the services of a seasoned elder law attorney is imperative to ensure the most favorable outcome.

There are many instances when utilizing an experienced attorney can make a significant difference. For example, the Medicaid applicant’s spouse may need to execute a spousal refusal in order for the applicant to successfully obtain Medicaid (a spousal refusal allows the well spouse to retain resources and income above the levels ordinarily permitted). Once a spousal refusal has been executed, however, the well spouse will be subjected to a potential lawsuit by the Department of Social Services. Knowing one’s legal rights and options in the face of a potential suit is critical.

Additionally, there are legal arguments that can be made with regard to the transfer of assets by the Medicaid applicant that would avoid the implementation of a potentially onerous penalty period. When someone other than an elder law attorney handles the Medicaid nursing home application, however, these opportunities are almost always overlooked.

It’s also important to consider that the application process for Medicaid nursing home or home care is one that typically takes several months as further documentation and explanations are often required. Medicaid officials may require up to five years of financial records and will closely examine every detail. Any unexplained or questionable expenses – even those that are part of routine planning – can disqualify the applicant if not properly handled. In most cases, elder law attorneys are able to complete this process much faster, saving the applicant a significant amount in care expenses. 

There is also post Medicaid eligibility planning, which is often needed (and which a non-attorney cannot advise upon). The failure to properly make these arguments and to be in a position to get the proper legal representation provided by an experienced elder law attorney can result in tens of thousands of dollars being unnecessarily spent by the applicant and his or her family.

What is the Difference Between a Revocable Living Trust and a Last Will & Testament in New York?

One question I am often asked is the difference between a Last Will & Testament and a Revocable Living Trust. While many simply default to a Last Will as their primary estate planning document, the Revocable Living Trust has been gaining significantly in popularity over the past several years. Here are the basics on both:

Last Will & Testament
A Last Will & Testament is a legal document that allows you to specify how (and to whom) your assets are to be distributed when you pass away. The document also outlines the person(s) who will be responsible to carry out your wishes.

It is important to remember that the Last Will & Testament only controls the assets that are in the name of the decedent alone on the date of his or her death – not assets jointly held by the decedent with another, such as a spouse, or which have named beneficiaries. In New York State, a Last Will & Testament must be admitted into probate by the Surrogate’s Court in the county where the decedent resided. In probate, the Last Will must be proved to be valid, property must be inventoried and appraised, and any debts and taxes must be paid before the decedent’s assets are distributed.

Revocable Living Trust
Created during an individual’s lifetime, a Revocable Living Trust is a written agreement that determines how property titled in the name of the trust is to be managed and distributed while he or she is alive and upon death. The trust’s grantor (or creator) retains the power to freely amend and revoke the trust as well as to reacquire its assets. This means he or she can change the terms of the trust at any time or, if desired, cancel it completely.

In New York, the same person can be both the grantor and sole trustee so long as one or more other person holds a beneficial interest (can be vested or contingent – for the present or future). A lifetime trust will be deemed to be irrevocable, which generally means it cannot be amended or revoked by the grantor, unless it expressly provides that is revocable.

The Revocable Living Trust only controls assets titled in the name of the trust. Upon the death of the grantor, it becomes irrevocable and, unlike a Last Will, does not need to go to probate. The trust’s assets will be available for immediate distribution after the death of the grantor, subject to insuring sufficient assets are available to pay estate taxes and debts. This can result in a significant saving’s to the decedent’s estate.

Finally Some Estate Tax Relief for New Yorkers

Fearing a continued exodus of affluent New Yorkers to states that do not impose a state estate tax, the State of New York has finally enacted significant changes to N.Y. Tax Law Section 952.

The most significant change is the increase in the basic exclusion amount for the imposition of New York estate taxes. Thus, for individuals dying on or after:

  • 4/1/14 and before 4/1/15 – $2,062,500 per person exclusion
  • 4/1/15 and before 4/1/16 – $3,125,000 per person exclusion
  • 4/1/16 and before 4/1/17 – $4,187,500 per person exclusion
  • 4/1/17 and before 1/1/19 – $5,250,000 per person exclusion

Clearly, the significant disparity that existed between the Federal estate and gift tax credit ($5.34 million per person for 2014) and the substantially smaller New York exclusion ($1 million per person) was a significant impetus for the enacted changes. It should be noted that after January 1, 2019, the basic exclusion amount will be indexed for inflation from 2010. This should allow the New York exclusion to be approximately equal to the federal amount.

Unfortunately, while Governor Cuomo and the State Legislature were in favor of increasing the basic exclusion amount, it appears that they believed that if the estate of the resident decedent (deceased individual) exceeded the basic exclusion amount by more than five percent, then the entire taxable estate should be subjected to a New York estate tax. With the top rate remaining at sixteen percent, this can result in significant New York estate taxes – especially during the period prior to the exclusion amount reaching $5.25 million on April 1, 2017.

Also important to note is that while under federal law the surviving spouse can utilize the unused federal exclusion of the decedent spouse ($5.34 million) pursuant to the “portability” provisions, no such “portability” provision exists under New York state law.

While there was discussion of a significant “add back” to the taxable estate for taxable gifts made, its application was significantly limited to a three year look back in the enacted legislation. As it now stands, the New York gross estate of a resident decedent will be increased by the amount of any taxable gift not otherwise included in the decedent’s federal gross estate made during the three year period ending on his or her date of death. This does not include any gift made: (1) when the decedent was not a resident of New York state; (2) before April 1, 2014; or (3) on or after January 1, 2019.

While this “add back” regarding taxable gifts may succeed in generating additional estate tax revenue, it could also result in New Yorkers seeking non-resident status if they wish to avoid the estate tax and are interested in sheltering assets from the cost of long term care.

Clearly, the aforementioned changes to the New York estate tax are welcomed. However, whether in the long run they will have the intended effect of preventing New Yorkers from moving to tax friendlier states is something only time will tell. It is definitely a step in the right direction.