Who Owns the Property in an Irrevocable Trust in New York City

The legal owner of the property in an irrevocable trust is the trustee. However, this trustee only manages the trust property for the benefit of the beneficiaries.
The grantor would transfer the trust property to the name of the trustee. For example, the grantee would be named, “ABC, as Trustee of XYZ Irrevocable Trust.” And the trust would specify who benefits from the property and how.

What is an Irrevocable Trust?

An irrevocable trust is a trust that cannot be amended, modified, or revoked by the grantor without the consent of all the beneficiaries. In an irrevocable trust, the grantor transfers property to the trustee, who then administers the property for the benefit of the beneficiaries in accordance with the provisions in the trust document. The grantor cannot take back this property anymore once it is transferred to the trust. Hence, its irrevocability.

Because an irrevocable trust cannot be amended, modified, or revoked, it is considered an entity separate and independent from the grantor. The irrevocable trust will have its own tax identification number (EIN) and will report the income of the property using its own EIN and not the grantor’s social security number. Because the trust property is considered owned by the irrevocable trust and not the grantor’s, property transferred to the irrevocable trust is protected from the grantor’s creditors. For these reasons, irrevocable trusts are normally used to reduce one’s assets for purposes of Medicaid eligibility and to shield assets from Medicaid recovery.

Irrevocable Trust Property is Not Considered Grantor Property

Property in an irrevocable trust is not considered the grantor’s property. When the grantor is applying for Medicaid, his property transferred to an irrevocable trust before the lookback period (usually 60 months prior to applying for Medicaid, but in New York, 30 months beginning March 31, 2024 for Medicaid home care) will not be considered his property. Thus, the irrevocable trust allows the grantor to reduce his assets on paper.

Irrevocable Trust Property Where Grantor Retains Life Estate

It is still an irrevocable trust, even if the grantor retains a life estate for himself. The inclusion of a life estate for the grantor does not change the trust’s irrevocable nature of the transfer. The grantor still cedes complete control and ownership over the trust property to the irrevocable trust, which the trustee then manages in accordance with the trust provisions.

Because the irrevocable trust cannot be amended, modified, or revoked, a lot of individuals are wary about transferring property to an irrevocable trust. However, the need to have an irrevocable trust due to creditor protection, Medicaid eligibility, and protection from Medicaid recovery, most often prevails.

Drafting an irrevocable trust requires the expertise of an attorney, especially when a grantor retains a life estate or becomes a lifetime income beneficiary. It is important that, despite the grantor retaining these benefits, the irrevocable trust’s provisions still comply with tax or Medicaid laws to ensure that such irrevocable trust will serve its purpose.

Should you need assistance in drafting an irrevocable trust, we at the Law Offices of Albert Goodwin are here for you. We have offices in New York City, Brooklyn, NY and Queens, NY. You can call us at 212-233-1233 or send us an email at [email protected].

The Different Roles in an Irrevocable Trust

To understand ownership in an irrevocable trust, it helps to distinguish the three main roles:

The grantor (also called the settlor or trustor) is the person who created and funded the trust. The grantor's role typically ends at funding — once the assets are transferred to the trust, the grantor no longer has direct control over them. In some irrevocable trusts, the grantor retains certain limited rights (a right of occupancy, a right to income, a limited power of appointment), but the grantor's role is constrained by the trust's terms.

The trustee is the legal owner of the trust assets. The trustee holds title in their fiduciary capacity, not personally. The trustee manages the assets for the beneficiaries' benefit, subject to the trust's terms and applicable law.

The beneficiaries have the equitable or beneficial interest in the trust. The beneficiaries do not have title to the assets but they have the right to receive distributions according to the trust's terms. The beneficiaries can enforce the trust's terms against the trustee through court proceedings.

This split of legal and equitable ownership is one of the foundational concepts of trust law. It allows for separation of management (the trustee's role) from benefit (the beneficiaries' role).

The Tax Treatment of Irrevocable Trusts

Irrevocable trusts are typically separate taxpayers with their own EINs. Tax issues that come up:

Income tax. The trust files Form 1041 federal returns and IT-205 New York returns. Trust tax rates are compressed — the trust hits the top tax bracket at much lower income levels than individuals. Distributions to beneficiaries shift the tax burden to the beneficiaries through Schedule K-1.

Grantor trust rules. Some irrevocable trusts are "grantor trusts" for income tax purposes even though they are not grantor trusts for estate tax purposes. The grantor remains the taxpayer on the trust's income. This treatment is sometimes deliberately created (intentionally defective grantor trusts) and sometimes incidentally created by retained powers.

Gift tax. Funding an irrevocable trust is generally a completed gift subject to gift tax reporting (Form 709). The gift uses the grantor's annual exclusion or lifetime exemption.

Estate tax. Properly structured irrevocable trusts remove assets from the grantor's taxable estate. Improperly structured trusts can be pulled back into the estate under various Internal Revenue Code provisions (sections 2036, 2038, 2042, etc.).

Generation-skipping transfer tax. Some irrevocable trusts implicate GST tax. Allocation of the GST exemption is part of the planning.

Medicaid and Irrevocable Trusts

Irrevocable trusts are the workhorses of Medicaid asset protection planning in New York. The Medicaid Asset Protection Trust (MAPT) holds the grantor's home and other significant assets outside the grantor's countable resources after the look-back period expires.

For the MAPT to be effective:

• The grantor must give up the right to revoke or amend the trust.
• The grantor must give up the right to receive distributions of principal.
• The trustee should not be the grantor or the grantor's spouse.
• The trust must be funded outside the 60-month institutional Medicaid look-back period.
• For Community Medicaid, the new 30-month look-back rules (when fully implemented) must also be considered.

The grantor can typically retain a right to receive trust income, a life estate or right of occupancy in real property, and certain other limited interests without defeating the planning. The specific design depends on what the grantor needs to preserve and what the grantor is willing to give up.

Asset Protection Through Irrevocable Trusts

Irrevocable trusts also provide asset protection from the grantor's creditors. Once the grantor transfers assets to a properly structured irrevocable trust, those assets are generally not reachable by the grantor's future creditors. The protection has limits:

• Existing creditors. Transfers made when the grantor has known creditors can be challenged as fraudulent conveyances and undone.
• Domestic asset protection trusts. Some states permit self-settled spendthrift trusts that protect the grantor's own assets from the grantor's own creditors. New York does not. Out-of-state DAPTs have varying enforcement.
• Specific exception creditors. Tax authorities, domestic support obligations, and certain other creditors can sometimes reach trust assets despite the protections.

The Grantor's Continuing Connection to Trust Assets

Despite the legal separation, the grantor often retains a meaningful practical connection to trust assets:

• In a MAPT, the grantor often continues to live in the home, even though the trust owns it.
• In a SLAT, the grantor's spouse receives distributions that benefit the household.
• In an ILIT, the trust holds policies on the grantor's life, with the death benefit eventually flowing to family members.
• In a charitable trust, the grantor may receive income or recognition during life even though the eventual remainder goes to charity.

The trick is balancing the legal disconnection (which is needed for the planning to work) with the grantor's continuing practical interests. Skilled drafting maintains the planning benefits while preserving the grantor's reasonable participation.