Though there are variations, broadly speaking, there are two different types of trusts: revocable trusts, and trust that cannot be revoked. There are people that wonder why you would want to use an irrevocable trust that ties your hands when there is another option.
We will provide the answer is this post.
Incidents of Ownership
In the legal realm, there is a concept called “incidents of ownership.” You surrender incidents of ownership if you have an irrevocable trust, because you are permanently giving up ownership of the assets that you have conveyed into it.
With a revocable living trust, you can in fact revoke the trust, so there is no permanent separation. It should be noted that you could act as the trustee if you establish a revocable living trust, and this is not the case with an irrevocable trust.
Estate Tax Efficiency
There are reasons why you may want to surrender incidents of ownership, which can be described more simply as an exercise in getting assets out of your own name. The pursuit of estate tax efficiency is one of them.
The federal estate tax looms large for high net worth individuals, because it carries a 40 percent maximum rate.
To gain estate tax efficiency, you could convey assets into an irrevocable trust of some kind. We will save the details for another post, but the trusts that are utilized include generation-skipping trusts, qualified personal residence trusts, life insurance trusts, and charitable lead trusts.
Most senior citizens will require living assistance at some point in time. The number is 70 percent according to the United States Department of Health and Human Services, and over one third of elders will eventually reside in nursing homes.
These facilities are very expensive, and Medicare does not pay for custodial care. Medicaid will pick up the tab, but it is a need-based program, so there is an asset limit of $2000.
In spite of this, most senior citizens in nursing homes are enrolled in the Medicaid program. This can be done by divesting yourself of assets before you apply, but you have to plan ahead effectively.
The gift giving must be completed at least five years before you submit your application. If you violate this rule, your application will denied.
You could convey assets into an irrevocable income-only Medicaid trust in an effort to adopt a financial position that will lead to eligibility. Though you would have no access to the principal, you would be able to receive income that is generated by the assets in the trust.
The principal would not count against you if and when you qualify for Medicaid to pay for long-term care.
Inheritance Protection Upon Remarriage
If you are getting remarried as a parent, and you are in possession of considerable resources, you may have estate planning concerns. Your spouse would be a priority, but would you want to make sure that the inheritances that you want to leave to your children are protected.
This can be done through the creation of an irrevocable qualified terminable interest property trust.
Your spouse would be the first beneficiary, and he or she would be able to use assets in the trust after your death. They would also receive distributions of the trust’s earnings, but the surviving spouse would not be able to alter the terms of the trust.
After the death of your spouse, your children would become the beneficiaries of the trust.
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