As your estate plan grows and expands, there is a good chance you will include at least one trust into that plan. One of the decisions you will need to make if you establish a trust is whether to create a revocable or irrevocable trust. As the name implies, an irrevocable living trust is one that cannot be modified or revoked by the Settlor once the trust is established. Understandably, you may be hesitant to create a trust that you cannot modify or terminate; however, sometimes doing so is crucial to accomplishing the trust purpose. A Los Angeles attorney at Schomer Estate & Wealth Advisors explains some important benefits of including an irrevocable trust in your estate plan.
When Does a Trust Purpose Require an Irrevocable Trust?
The idea of creating a trust that you cannot change once the trust is activated probably gives you pause. A better understanding when an irrevocable living trust is necessary to achieve the trust purpose is needed to reconcile the idea of establishing a trust that cannot be modified or revoked. Common trust goals that require an irrevocable trust include:
- Asset Protection. Divorce, economic downturns, creditors, and even spendthrift beneficiaries can all create a threat to your hard-earned assets. By transferring assets into an irrevocable living trust, you remove those assets from your estate, thereby placing them out of the reach of the numerous threats that could be lurking around the corner. The concept is simple. If you no longer have any legal ownership interest in the assets because they are now owned by the trust, they cannot be lost to divorce, creditors, or any of the numerous other potential threats.
- Tax Advantages. Irrevocable trusts can provide significant tax benefits. Because the assets in an irrevocable trust are no longer considered part of your estate, they are not subject to estate taxes upon your death. Additionally, any income generated by the trust can be taxed at the trust’s tax rate, which may be lower than your personal tax rate. In some cases, this structure can also help reduce or eliminate capital gains taxes when trust assets are sold.
- Special Needs Planning. For the parents of a child with special needs, estate planning takes on a heightened importance. The law considers your child a legal adult when he/she turns 18 which means eligibility for state and federal assistance programs will be based, in part, on your child’s income and assets. Direct gifts could cause your child to lose his/her eligibility for much needed assistance. The good news is that a Special Needs Trust can help. A special needs trust is an irrevocable living trust that supplements the care and assistance that an individual receives from other sources. The trust must be irrevocable, however, for the state/federal government will recognize it as a special needs trust but if it is drafted properly, the assets held in the trust will not jeopardize the beneficiary’s eligibility for assistance.
- Medicaid Planning. As a senior you may need to depend on Medicaid (Medi-Cal in California) to help defray the high cost of long-term care. Qualifying for Medicaid, however, can be problematic for a senior because eligibility is based, in part, on an applicant’s income and assets. If your non-exempt assets exceed the limit at the time you apply for Medicaid, you will be forced to “spend-down” those assets, which essentially means you must rely on the assets to help cover your nursing home costs until you deplete them. One way to avoid that outcome is to establish a Medicaid trust as part of a Medicaid planning component in your estate plan. A Medicaid trust is an irrevocable living trust that protects your non-exempt assets and allows you to qualify for Medicaid when you need it. The Medicaid program will only recognize the trust as a legitimate Medicaid trust if it is irrevocable.
Can We Help You Establish an Irrevocable Trust?
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about establishing an irrevocable trust, contact the experienced Los Angeles trust attorneys at Schomer Estate & Wealth Advisorsby calling (310) 337-7696 to schedule an appointment.
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