Reasons to Create an Irrevocable Trust


An Irrevocable Trust is a trust that cannot be changed once it is created, and once you transfer an asset into that Trust, you usually cannot remove it. They are used for very specific reasons for the most part, and some of these reasons are:

You want to protect assets from having to be spent on long-term care costs.

The average cost of nursing home care in MA is about $10,000 per month with three ways to pay for it: 1)long-term care insurance; 2)private pay (writing a check each month); or 3)Medicaid, the state and federally-funded program that pays for long-term nursing home care if a person is both medically and financially eligible. In order to be considered financially eligible, a person cannot have more than $2,000 in so-called countable assets, and to prevent people from giving away their assets in order to qualify for benefits, Medicaid imposes a period of ineligibility following the gratuitous transfer of an asset. The ineligibility period for giving away assets is normally five years from the date of the gift. For those who feel confident that nursing home care will not be needed for more than five years, transferring assets to an Irrevocable Trust can be an effective way to preserve assets for children.

You want to keep life insurance proceeds from being taxable in your estate.

Although the new federal tax law enacted on December 17, 2010 exempts estates valued at less than $5 million from federal estate tax, Massachusetts imposes an estate tax on estates valued at $1 million or more. One common estate tax planning strategy is to buy life insurance so the surviving family members don’t have to liquidate real estate or borrow money to pay the estate tax. While life insurance proceeds are not taxable income to the person who receives them, life insurance is a taxable asset in the estate of the insured if that person is also the owner of the policy. If instead an Irrevocable Life Insurances Trust (otherwise known as an ILIT) owns the life insurance policy, the proceeds are not part of the insured’s estate.

You want to make qualifying annual exclusion gifts to minors.

Many people know they can make annual gifts of a certain amount each calendar year to any number of people without estate or gift tax consequences. Currently, the annual exclusions gift is $13,000 per calendar year per person. To qualify as an annual exclusion gift, it must be a “present interest” gift, meaning the recipient must have immediate access to and control over said gift. Parents and grandparents may want to give gifts to minor children and grandchildren, but don’t necessarily want the child to have access to funds at a young age. There is a special type of Irrevocable Trust allowed under the Internal Revenue Code that addresses this issue, which means if the Trust is properly drafted; the gifts to the Trust will qualify for the annual gift tax exclusion. However, the beneficiary’s right to gain access to the funds is restricted until the beneficiary reaches the age of 21.

You want to protect governmental benefits for a person with disabilities.

Individuals with disabilities may be eligible for a variety of governmental benefits that provide income and medical care; many of these benefits are needs-based, which means that a person may not have assets in excess of the program limit in order to qualify.

These are just a few specific reasons why using an Irrevocable trust may be appropriate for a certain situation. Everyone’s circumstances are different, and in every case, it is important to consult with a qualified estate planning or elder law attorney to develop a plan that works.

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