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 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.