Using Irrevocable Trusts

Using Irrevocable Trusts

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Irrevocable trusts come in many different “flavors”.  These trusts may be written to accomplish a wide variety of objectives and purposes.  Such objectives and purposes range from asset protection to estate tax shelters to protection of government assistance benefits for an ill spouse or a person with disabilities.

One of the most important roles for an irrevocable trust is asset protection in the event of a long term care illness, such as Alzheimers, dementia, Parkinsons, stroke, etc.  The goal is to place assets into a properly drafted irrevocable trust, which minimizes loss of control while maximizing future eligibility for Medicaid and Veterans benefits.  In this way, you are limiting the erosion of your estate’s assets, safeguarding those assets for your or your spouse’s future needs, and ensuring an inheritance to your beneficiaries.

CAUTION:  An Irrevocable Trust drafted to meet the rules and regulations for Medicaid to disregard the trust’s assets as available resources is very different than an Irrevocable Trust drafted to meet the rules and regulations for the Veterans Administration to disregard the trust’s assets as net worth.  This is a critical area where you must know you are working with an Expert in Elder Law, including Medicaid and Veterans Benefits.  If your elder law attorney cannot explain the difference between the types of irrevocable trusts necessary in each context, then you likely are not working with an expert.

Who Should Consider an Irrevocable Trust?

There is no “black-and-white” answer to this question.  But, here are a few general guidelines.

Obviously, irrevocable trusts should be established by older adults who wish to protect their assets.  The older adult needs a sense of emotional security because he or she must be ready to relinquish direct control over his or her assets.  Most of the control over the assets is turned over to a loved and trusted family member, who acts as trustee of the trust.  The trustee is in charge of guarding the assets in the irrevocable trust, in case a future need arises.  Meanwhile, the older adult continues to maintain direct control over his or her income, such as social security and pensions, as well as assets chosen to remain outside the irrevocable trust.  The trust works particularly well for those older adults that are not eroding the principal of their existing assets.

Irrevocable trusts have the additional benefit of passing assets to beneficiaries of the older adult without requiring a probate.  Also, the irrevocable trust can set incorporate special purpose estate planning, such as special needs trusts or discretionary trusts for children

Because the transfer of assets to an irrevocable trust is subject to a waiting period for Medicaid eligibility of 5 years, it is anticipated that the older adult will not need nursing home care for 2 or 3 years.  If the older adult is a veteran or a widow(er) of a veteran, then eligibility for the Veterans Aid & Attendance benefit is not subject to a waiting period.  This provides more flexibility for a veteran or a widow(er), allowing him or her to establish an irrevocable trust with less concern over an unanticipated medical crisis.

What are the Steps for Establishing the Irrevocable Trust?

Your irrevocable trust should be created as a result of a customized plan suited to your personal objectives and not a “one size fits all” form.  Since the irrevocable trust must accomplish your objectives, we need to know for what purpose or purposes we are planning. 

A multitude of questions must be answered before the trust can be drafted by your elder law attorney.  Do you want to achieve Medicaid benefits in the future?  Are you a veteran or a widow(er) of a veteran so that the trust must allow for Veterans Benefits to be attainable in the future?  Do you want to retain income from the assets after they are placed in the irrevocable trust?  What other controls do you want to retain?  Will you appoint a neutral, independent third party to have specific authorities to adapt the trust to unforeseen circumstances, such as future changes in the law?  Will there be tax advantages built into the irrevocable trust?  Do you need to draft any protections for your ultimate beneficiaries of the trust who are disabled or who creditor issues or who get divorced?

After a full understanding of the purposes for the irrevocable trust, then your assets need to be analyzed.  Some assets, as compared to other assets, may be selected to go into the irrevocable trust.  In addition, what is an appropriate amount of assets to place in the irrevocable trust and what is an appropriate amount of assets to be left out of the trust? Again these are all very important considerations that go into an asset protection plan using an irrevocable trust.