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Irrevocable Trusts – Not as Frightening as You Might Think!: Part 1
Many people hear the words “irrevocable trust” and think that the irrevocable nature of the instrument requires inflexibility and rigidity, or that they will lose control over their assets. This is a common myth. As this series of articles will show, an irrevocable trust may enable an individual to retain a significant degree of control over assets during life, while providing for protection from creditors and reducing tax liability for the person’s heirs following death. Putting assets into an irrevocable trust also may help to reduce the risk that a child’s creditor or ex-wife will take the assets while the parent is alive.
One very big concern that has been growing recently is the possibility that a person’s hard-earned assets will be taken to cover the costs of necessary long-term medical care, leaving nothing to transfer to the healthy spouse, children, or other loved ones. Long-term care costs have been rising, and the law allows Medicaid to look back up to five years to take assets that have already been transferred. For that reason, it is important to come up with a strategy to protect these assets while a person is healthy, before the need for long-term medical care arises. The longer that a person waits to protect assets, the more likely it is that the assets will not be protected. One way for parents to avoid having their assets confiscated to pay for long-term medical care is to place the assets in an irrevocable trust as part of a comprehensive estate plan.
Consider a hypothetical married 70-year-old couple in good health with two children that lives in Massachusetts. They own a home worth approximately $500,000 and have approximately $300,000 in other assets. The couple wants to protect their assets from being taken to pay creditors, including long-term care providers, and to avoid the costs associated with probate. One solution for this couple may be to transfer all or some of their assets to an irrevocable trust. The husband and wife would be the donors to the trust and would choose an independent trustee to manage their trust during their respective lifespans. The trustee, would have the ability to pay necessary expenses from the trust assets. Using an independent trustee can give a person a much greater sense of safety than transferring assets to outright children as gifts.
In this example, when the husband and wife pass away, any assets put into an irrevocable trust are not included in the person’s estate for the calculation of Medicaid assistance, the estate tax, or probate. In Massachusetts, the state can only take assets included in the probated estate to pay for long-term medical care. The probated estate includes assets owned individually at the time of death. Assets owned by an irrevocable trust are not owned in the individual’s name and therefore are not part of the probated estate. Therefore, these assets are not subject to Medicaid’s estate recovery provision in Massachusetts. That means, ultimately, that assets in the trust will be preserved for the person’s heirs.