BY ANTHONY J. ENEA
My clients are always asking me which is better ”” an irrevocable trust or a revocable living trust. Much to their dismay, the answer is that one is not better than the other. Irrevocable and revocable trusts are excellent estate and elder law planning tools that, depending on your objectives, can both be of significant value when used as part of your planning.
A revocable living trust is a trust agreement that is amendable and revocable during one”™s lifetime. The creator of the trust can be both the creator and the sole trustee. This gives him or her full, unfettered control over the assets transferred to the trust. He or she can also specify to whom ”” and in what amounts/percentages ”” the assets titled in the trust are to be distributed to upon his or her demise.
At death of the creator, the revocable trust becomes irrevocable, and thus, the assets titled in the name of the trust will not be subjected to probate. The named trustees will be able to make payments of the decedent”™s bills, taxes and expenses and make distributions to the named beneficiaries of the trust without the court intervention that would be required with the probate of a last will and testament.
To effectively utilize a revocable trust, it is absolutely essential that one”™s assets, such as bank accounts, stocks, bonds and real property, be titled in the name of the trust. The trust does not control assets that are not titled in its name. A revocable trust is not an appropriate vehicle, however, to protect assets from the cost of long-term care (in home care and/or nursing home). The assets titled in the name of the trust will be considered available resources for purposes of Medicaid eligibility. Medicaid can impose a lien/claim against these assets.
The primary reason for the use of a revocable trust remains the avoidance of the probate process and the associated legal fees, costs and delays. It also has the added advantage of allowing the alternate named trustees to manage the trust assets in the event the creator becomes incapacitated or disabled.
In regard to the irrevocable trust, there are various types with differing purposes and objectives. If you would like to gift assets during your lifetime for the benefit of your children and/or grandchildren, an irrevocable trust may be appropriate. If you have a disabled child or grandchild, an irrevocable special needs trust is frequently recommended. If you have significant life insurance assets and don”™t want the assets to go outright to the beneficiary, an irrevocable life insurance trust is often utilized.
Perhaps the most common irrevocable trust utilized by seniors today is the irrevocable Medicaid asset protection trust, which is ideal for individuals wanting to protect their home and a portion of their life savings against the ravaging costs of long-term care. With the average cost of a nursing home in the New York metropolitan area being in excess of $15,000 per month, failing to do so can have dire consequences.
An irrevocable trust cannot be amended and/or revoked by the creator, and neither the creator nor his or her spouse should be appointed as trustee of said trust.
The transfer of assets to the irrevocable trust will disqualify the creator of the trust and his or her spouse from eligibility for nursing home Medicaid (not Medicaid home care) for five years. Once the five years have elapsed, however, the assets in the trust are no longer available resources for purposes of Medicaid eligibility and Medicaid cannot file a claim and/or lien against the trust assets.
While an irrevocable trust does not allow the trustees to distribute the trust principal to or for the benefit of the creator, the creator can receive any income generated by the trust assets and have the right to reside in and utilize any real property transferred to the trust during their lifetime. The trust creator will continue to be able to utilize any tax exemptions available such as STAR, senior citizen and veterans, and can also take advantage of the personal residence exclusion for income tax purposes in the event the residence is sold.
Additionally, while the trustees cannot distribute trust principal to the creator, the creator can give the trustees the power to distribute principal and income to their children and others. This can be of value if access to the trust principal is ever needed.
Like the revocable trust, the assets titled in the name of the irrevocable trust will not be subjected to the probate process.
As can be seen from the above, it is really not a question of which trust is better, but rather a question of one”™s comfort level and the goals and objectives one is seeking to accomplish.
Anthony J. Enea is a managing member of Enea, Scanlan & Sirignano LLP, with offices in White Plains and Somers. He is the past chair of the New York State Bar Association”™s Elder Law Section. He can be reached at 914-948-1500 or A.Enea@esslawfirm.com.
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