If you want to reduce estate or income taxes, protect assets, or become eligible for certain government benefits, you’re probably wondering how to set up an irrevocable trust. Unfortunately, there is no DIY way to set up an irrevocable trust. If you want to set up an irrevocable trust, you need to hire the services of a lawyer to write this document.
What is the set up an irrevocable trust
An irrevocable trust is a trust that cannot be revoked or amended without the beneficiaries’ consent. The grantor (the creator of the trust) usually cannot be the beneficiary, but in some cases, can be the trustee for as long as the trust gives clear directions on its administration and does not give the trustee discretion in the management and distribution of the assets.
Once the grantor transfers property to the trust, the grantor cannot take back the property anymore. For this reason, irrevocable trusts require careful consideration on whether this is the most appropriate estate planning tool to achieve your objective.
Why set up an irrevocable trust
Why would the grantor set up an irrevocable trust, thereby losing control and ownership over his properties? There are three main reasons why a grantor would set up an irrevocable trust: to protect assets, to minimize taxes, and to become eligible for government benefits.
To protect assets
One of the reasons why grantors set up irrevocable trusts is to protect assets, either for themselves or for their beneficiaries.
Once property is transferred to an irrevocable trust, creditors cannot attach this property anymore because such property is not considered the grantor’s anymore. If the trust is written correctly, creditors of the beneficiaries cannot also execute against the trust property, except for realized distributions to the beneficiaries.
Examples of irrevocable trusts that protect assets are special needs trusts, spendthrift trusts, and Medicaid asset protection trusts. Special needs trusts are established for persons with disability. Spendthrift trusts are usually established when the beneficiary cannot be trusted to manage his own money. When written correctly, the trust assets are not subject to the creditors of the beneficiary. Medicaid asset protection trusts are established so that assets of the Medicaid patient will not be subjected to the Medicaid recovery program. This is because an asset may be exempt for purposes of determining Medicaid eligibility, such as a house, but it is not exempt from Medicaid recovery of costs once the patient dies.
To minimize taxes
Another reason why grantors set up irrevocable trusts is to minimize income taxes and reduce or postpone estate taxes. Examples of irrevocable trusts that reduce taxes are bypass trusts, QTIP trusts, charitable trusts, grantor retained trusts, and generation skipping trusts.
Prior to 2010, federal estate tax was imposed on gross estates with a value of $1M. For this reason, a lot of irrevocable trusts were established to reduce estate taxes. Now, the exemption amount is higher at $6.11M as of 2022. For this reason, less people use irrevocable trusts to reduce estate taxes.
To be eligible for government benefits
Another reason to set up an irrevocable trust is to be eligible for government benefits, Medicaid in particular. In order to be eligible for Medicaid which provides institutional long-term care, an individual must comply with the income and asset limits. Although there are some assets that are not included in the counting of the asset limit, such as the house, most of the properties are considered for purposes of computing asset limits in determining Medicaid eligibility.
When individuals with many assets want to plan for the future and be eligible for Medicaid, they transfer properties to an irrevocable trust so that these properties will not be considered that individual’s property anymore. Irrevocable trusts are a great way to reduce wealth on paper.
Ways to combat irrevocability
An irrevocable trust, when set up correctly, is an effective way to protect assets, minimize taxes, and be eligible for government benefits. However, many individuals shy away from irrevocable trusts because they don’t want to lose control over their property.
An experienced estate planning lawyer will be able to give you some workarounds on the trust, such as the appointment of a trust protector or decanting a trust.
Decanting a trust
When setting up an irrevocable trust, an experienced estate planning lawyer can give decanting power to the trustee, depending on whether state law allows such power. A decanting provision gives the trustee discretionary power to pour the assets of the trust to a new trust with more favorable conditions but does not give the trustee power to change the beneficiaries.
Appointment of a trust protector
Depending on state laws, an experienced estate planning lawyer can include the appointment of a trust protector in the irrevocable trust. A trust protector can change the beneficiaries and choose from a class of beneficiaries or amend the distributions. For example, a trust protector can be given the power to choose from a class of beneficiaries, such as the descendants of the parent of the grantor. In this way, a trust protector can even choose the grantor himself as beneficiary if needed or required.
Only an experienced estate planning lawyer can help you set up an irrevocable trust. There is no DIY method to set up an irrevocable trust. Trying to DIY an irrevocable trust can result to expensive mistakes, especially when you have specific objectives such as Medicaid eligibility or asset protection. Should you need assistance in setting up an irrevocable trusts, the Law Offices of Albert Goodwin are here for you. We have offices in New York, NY, Brooklyn, NY, and Queens, NY. You can call us at 718-509-9774 or send us an email at email@example.com.