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Comparing Revocable and Irrevocable Trusts

Robin Burner Daleo • Mar 06, 2023

When thinking about what documents you should include as part of your estate plan, trusts often come to the forefront of the conversation. Do I need a trust? If so, what kind? The truth is that there are many kinds of trust, each with different benefits. For simplicity, we can separate trusts into two different classes, to wit: revocable and irrevocable.

Revocable trusts, like their name suggests, allow the creator of the trust total control over the assets they transfer to the trust. They can revoke the trust, change the terms, take things in and out. There is effectively no change in the way you can access the asset in a revocable trust except for the title. The main benefit revocable trusts offer is that they avoid having to probate a Will in order for your beneficiaries to receive their inheritance. If you pass away, without a trust, your Will must be submitted to Court with a petition signed by your nominated Executor and your family members must receive notice of the proceeding. For those that are leaving their estates to their family members, the probate process is not so cumbersome. However, for those that may be disinheriting a family member, probate can become a long and expensive process when relatives are fighting. Revocable trusts avoid this process because the Trustee is authorized to simply distribute the assets in your trust after the creator’s death without any court intervention.

Although executing a Revocable Trust can be extremely beneficial for the creator of the trust, unfortunately, one benefit which cannot be realized from the execution of a Revocable Trust is asset protection for Medicaid planning or tax savings. Because the grantor (creator) of a Revocable Trust maintains complete control over the assets in the trust during their lifetime, and in most cases, acts as trustee of their own trust, assets held in the trust are considered completely available to the grantor. Accordingly, these assets will also be considered completely available should the grantor need Medicaid to pay for long term care, or if the grantor is trying to remove assets from their estate for tax purposes. The good news is that the federal estate tax exemption for 2023 is $12.92 million per person, or $25.84 million per couple. This means, if you pass away with less than these assets, you will not have to worry about federal estate tax. Since the majority of folks do not have taxable estates, we will focus on Irrevocable Medicaid Qualifying Trusts.

The creation of an Irrevocable Medicaid Qualifying Trust allows you to place your home and any asset you wish to protect into a Trust to be managed by a third-party Trustee according to the provisions of your Trust. If you are the grantor of an Irrevocable Trust, neither you nor your spouse may function as the Trustee. Grantors commonly designate their children as Trustees. If the ownership of your residence is transferred to the Trust, you retain the right to live in the premises during your lifetime, yet the house could be sold if need be and replacement property could be purchased by the Trustee. You retain any property tax exemptions that you were entitled to prior to placing your residence into your Irrevocable Trust, including Senior Citizen and STAR. If you decide to sell your home, the trustee can do so on your behalf and the Trust would then hold the liquid funds resulting from the sale. Liquid funds, such as bank accounts, money market accounts, certificates of deposit, stocks, and bonds can also be transferred into your Irrevocable Trust. If your Irrevocable Trust holds title to such investments, you as the Grantor would continue to earn all the income from the investments but you would not be entitled to the principal. With respect to asset protection, once property, in the form of real estate or liquid assets, has been in your properly drafted Irrevocable Trust for a period of five (5) years, it is no longer considered an available resource in determining Medicaid eligibility for nursing home care.

Therefore, although you have not started the process of protecting your assets, there are other benefits which can be realized from the creation and funding of a Revocable trust. However, if asset protection is your goal, you should consult with an experienced Elder Law attorney to determine which course of action is best for your particular circumstance.

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May is National Elder Law Month

by Robin Burner Daleo • 03 May, 2024

May is National Elder Law Month, for that reason we have decided to switch from our normal format and answer a question that we are oftentimes asked in our practice, “What is an Elder Law Attorney and why do I need one?” Answer: Elder Law is a fairly new and unknown area of the law. As baby boomers and their parents’ age, they are living longer and oftentimes, living with chronic medical conditions. As the cost of long term care continues to spiral out of control and families struggle to meet the needs of their aging members, an experienced Elder Law attorney can help you and your family members establish an estate plan that maximizes protection of assets while ensuring that your loved one has the best care available to them should they face a health crisis. While it is always best to plan proactively, Elder Law attorneys are adept at crisis planning and oftentimes can provide a solution which can preserve assets or save taxes where others you have consulted have told you that no solution existed. Elder Law attorneys must be familiar with multiple areas of the law - contract law, estate planning, trusts and estate administration, Medicare, Medicaid, health care insurance regulations, Public Health Law, Mental Hygiene Law, the Internal Revenue Code & State and local tax issues. In each instance the issues that we deal with are fact sensitive and the clients must be willing to give us the information that we need to formulate the Elder Law plan. This in itself is oftentimes a struggle as the clientele that we deal with tends to value privacy and are oftentimes reluctant to divulge information regarding their assets and private family issues. The various disciplines that make up the Elder Law practice are in a constant state of flux. As a result, it requires the Elder Law attorney to spend a great deal of time reading current journals and cases and continuously taking legal education courses. In addition, many Elder Law attorneys meet in informal study groups to read, understand and strategize. As the facts change, there will likely be different solutions for each client. What works for one client may be totally inappropriate for another. For instance, in one day, we may see two different clients, both clients are 86 years old, own their own homes, and need long-term care. Client A has a daughter, age 55 and Client B has a niece age 55. Client A, on the eve of going into a nursing facility, is advised to transfer her home to her caretaker daughter, who lives with her and has lived with her for more than 2 years. The transfer does not make Client A ineligible for Medicaid. Client B cannot follow the same plan because her niece is not her child. There are no exceptions for transfers to caregiver nieces. Because we do not have an exempt transfer available to us for Client B I advise Client B to sell the home and advise her that even though no pre-planning has been done, we will likely be able to save more than sixty percent of her aunt’s assets by engaging in crisis planning. Remember - one size fits all – is not the rule. Your Elder Law plan is personal, fact sensitive and requires a careful review of all of the facts and circumstances. By: Robin Burner Daleo, Esq.