Does an Irrevocable Trust Help Save Money on Estate Taxes?

An irrevocable trust is a trust that provides a pre-arranged way to manage and preserve your assets if you become disabled and also keeps your assets out of probate court after your death. However, you have to remember every time you acquire new assets such as a new home to transfer the assets to the trust. Otherwise, assets that are held in your sole name at the time of your death are subject to New York probate.

A properly drafted irrevocable trust saves New York estate taxes because forming an irrevocable trust is the same thing as giving a gift, and there is no gift tax in New York. Assets that are transferred to a irrevocable trust are still owned and managed by you, so you do not reduce the value of your estate. Therefore you do not save federal estate taxes. Also, you may have to pay taxes on excess of the $14,000 annual gift tax exemption if you gift more than $14,000 per year because there is a federal gift tax. Married couples can gift up to $28,000 a year tax free.

There is also a lifetime gift tax exemption of $5,250,000. Married couples can transfer up to $10.5 million of their assets without having to owe any federal gift or estate tax. The portability laws allow one spouse to combine the other spouse’s unused portion of their lifetime gift tax exemption after the death of a spouse. The $14,000 annual gift tax exemption is not included as part of the lifetime gift tax exemption.

So let’s say that your spouse has gifted 3,000,000 at the time of death, and you have gifted $3,000,000. You can combine your spouse’s remaining $2,250,000 with your remaining $2,250,000 and have a total of 4,500,000 left as your remaining lifetime gift tax exemption.

When you form an irrevocable trust, that property is no longer part of your estate. Therefore, any assets that you transfer to an irrevocable trust reduces the value of your total estate for death tax purposes. So you can save estate taxes by forming an irrevocable trust. The main disadvantage of having an irrevocable trust over a revocable trust is you lose the ability to manage the assets with an irrevocable trust because you don’t own the assets any more. The trust owns the assets for the benefit of your beneficiaries.

Assets placed in an irrevocable Medicaid trust five years prior to going to a nursing home protect your assets. The assets can only be distributed to your children and not to you or your spouse. Assets placed in an irrevocable trust also avoid probate and your creditors cannot touch your assets that were placed in the trust prior to any lawsuit or judgment against you.

Making the decision to form a revocable or irrevocable trust is complicated and should be discussed with a qualified and experienced New York trust and estate attorney. The attorney will sit down and explain to you the benefits and disadvantages of the each and recommend the right type of trust for your financial situation. A New York trust and estate lawyer can assist with preparing other estate planning documents such as a will, power of attorney or health care directives.

If you wish to speak to a New York estate attorney, call the Law Offices of Albert Goodwin at (212) 233-1233.