Connecticut Elder Law Attorney
Allaire Elder Law
- 5 year rule. The purpose of this trust is not only to avoid probate, although that may be an effect, but more importantly to protect assets in the event that you need long term care. Medicaid is a program that can pay for such care, but the rule is that if you give away assets within 5 years of applying for Medicaid then you are penalized for having done so. The sooner you give away assets the sooner the clock starts running.
- Age. The decision to create this type of trust hinges on a person’s age and health. The determination on whether you believe you have at least 5 years of relatively good health (ie: low medical expenses that you can pay for yourself) is your determination to make. For most people, this trust makes sense to start somewhere between the age of 65-75. If you cannot make the 5 years then the trust funds could be used by distributing some of them to your children who in turn could pay for care needed to get you to the five year mark. Then the remaining assets would be protected. No one can predict the future. You can only consider the likelihood of needing a large amount of care within the next 5 years.
- Protection. The gifting rule does not change whether you gift to a trust or gift to a child. The difference is that the unfortunate things that can happen to a person (getting sick, divorced, sued) cannot happen to a trust. Therefore, the assets you place there cannot be lost due to bad fortune of your kids.
- Irrevocability and beneficiaries. The assets in the trust could not be given back to you. They could only be given to your beneficiaries (usually this is your children). If you needed those assets to live on then you would have to rely on your beneficiaries to choose to spend the money on you if funds were given to them. This method is what protects the assets. If you could demand the money back then no government program would pay for your care until you had spent all the assets.
- Added expense to run the trust. The trust would have to file its own income tax return, which may incur a CPA expense. Your personal taxes would not change. In addition, our firm would charge trustee fees as outlined in the written retainer if hired as a trustee after the trust is created.
Under the right circumstances, an intentionally defective irrevocable trust (IDGT) can be an effective estate tax planning tool. These trusts are set up to purposely fail certain technical tests in the tax law, yet they still have the approval of the
IRS and allow individuals to pass more assets on to their heirs. Here are a couple of points to keep in mind:
- An IDGT is considered to exist as a separate taxable entity for federal estate tax purposes and general state law purposes.
- However, an IDGT is considered to be a grantor trust for federal income tax purposes. As such, the IDGT's income and deduction items are treated as belonging to the grantor (the person who sets up the trust).
- Any income, gain, and deduction items related to the IDGT's assets are reported on your personal federal income tax returns, because you are still considered to own the assets for federal income tax purposes.
- Bottom Line: The IDGT is considered to exist for estate tax purposes but not for income tax purposes. It is therefore described as "defective" but the defect is intentional.
Once property is transferred to such a trust it is owned by the trust for the benefit of the named beneficiaries. Therefore, it is safe from legal judgments and creditors.
- An irrevocable trust is a type of trust where its terms cannot be modified, amended or terminated without the permission of the grantor's named beneficiary or beneficiaries.
- The grantor, having effectively transferred all ownership of assets into the trust, legally removes all of their rights of ownership to the assets and the trust.
- Irrevocable trusts cannot be modified after they are created, or at least they are very difficult to modify.
An irrevocable trust has a grantor, a trustee (if you want a beneficiary to be a trustee then there must be two trustees, because one must not be able to benefit from the trust assets) and a beneficiary or beneficiaries. Once the grantor places an asset in an irrevocable trust, it is a gift to the trust and the grantor cannot revoke it. The grantor can dictate the terms, rules and uses of the trust assets with the consent of the trustee and the beneficiary.
Irrevocable trusts can have many applications in planning for the preservation and distribution of an estate, including:
- To prevent beneficiaries from misusing assets, as the grantor can set conditions for distribution.
- To remove appreciable assets from the estate while still providing beneficiaries with a step-up basis in valuing the assets for tax purposes.
- To gift a principal residence to children under more favorable tax rules.
- To deplete one's property to ensure eligibility for government benefits, such as Social Security income and Medicaid. Such trusts can also be used to help secure benefits and care for a special needs child by preventing disqualification of eligibility.
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