You may view a trust as something that is only useful for an individual who is very wealthy. This is not entirely true, but there are trusts that are used by people who have accumulated a great deal of wealth, largely because high net worth individuals could be exposed to estate taxes.
There is a federal estate tax, and it carries a $5.43 million exclusion during the current calendar year. If you are transferring more than $5.43 million, you have to be concerned about the federal estate tax. Irrevocable trusts of various kinds are used by people who are looking for estate tax efficiency.
As the name would indicate, you cannot revoke this type of trust. You are surrendering incidents of ownership when you convey assets into an irrevocable trust. The assets become the property of the trust, and they are no longer your direct personal property. As a result, generally speaking, assets in an irrevocable trust would be removed from your estate for estate tax purposes.
There are also certain types of irrevocable trusts that are used by people who want to protect assets. Asset protection is very important for individuals who are in professions that are inherently open to legal actions, like physicians and landlords.
Nursing Home Asset Protection
Many people seek Medicaid eligibility when they are senior citizens, because Medicare does not pay for nursing home care. Since Medicaid is a program that is only available to people with limited resources, seniors seeking eligibility often give gifts to their loved ones before they apply.
Clearly, you could give direct gifts, but you could alternately convey assets into an irrevocable Medicaid trust. These assets would not be counted when your eligibility status was being determined.
Revocable Living Trusts
We have looked at the value of irrevocable trusts in this point, so we should now provide an explanation of revocable living trusts. You can in fact revoke or dissolve this type of trust, so you retain incidents of ownership. As a result, this type of trust would not provide estate tax efficiency or asset protection. Plus, assets in a revocable living trust would be counted by the Medicaid program.
In spite of the above, there are benefits to be gained. You could empower a successor trustee to administer the trust in the event of your incapacitation, and this is one benefit. Secondly, the trustee that you name could distribute assets in a timely manner outside of probate after your passing.
Thirdly, you do not have to leave behind lump sum inheritances when you create a revocable living trust. You could have the trustee manage the assets in the trust, and you could allow for measured distributions to the beneficiaries over an extended period of time.
Schedule a Free Consultation
If you are interested in creating a trust of some kind, contact us through this page to set up a free consultation: Bucks County PA Estate Planning Attorneys.