Trusts are an attractive and widely useful estate planning tool that can benefit the wealthy and those of limited income alike. However, not all trusts are created equal – each situation requires a thoughtful analysis of which type of trust will best achieve the desired goal. An irrevocable trust allows certain tax benefits, other financial protections, privacy, and simplified estate administration. However, its creation must be undertaken with care because an irrevocable trust generally cannot be changed or revoked.
At Pierro, Connor & Strauss, we provide the individual attention needed to ensure that your estate plan consistent with your intent. We can help you understand the role of the irrevocable trust as it relates to your estate planning and the future of those you care about.
What is an irrevocable trust?
An irrevocable trust is often used as an alternative to gifting money or property outright to an individual and can pose several issues if the person receiving the gifted assets may be vulnerable to creditors or potential lawsuits. Rather than giving the full rights to the property to the intended beneficiary, a trust is a separate entity that can hold and protect assets. The “grantor” (the creator of the trust) retains certain rights to make decisions about the trust holdings while the “beneficiary” has the right to receive benefits flowing from the assets in the trust. These assets are managed by the third party known as the “trustee.”
Absent special circumstances, some terms of an irrevocable trust cannot be changed or revoked after it is created. For example, while the creator may change the beneficiary or the amount they receive, they cannot reclaim the deposited property as their own.
The lack of flexibility offers some benefits because the property becomes essentially untouchable once it is transferred to the trust. These benefits include:
- Possible elimination of probate. When an individual dies with a Will their assets will go through a court proceeding known as probate to prove that such Will is a valid document. An irrevocable trust created during an individual’s lifetime can avoid this proceeding if assets are transferred to the trust before an individual’s death. Creating a trust alone will not be enough to avoid probate, the Trust needs to be properly funded to ensure probate avoidance. If certain assets remain outside the Trust a probate proceeding may be necessary.
- Protection of benefits. Certain types of irrevocable trusts can be created to protect against an individual’s long term care costs. If assets are held in trust for the appropriate period they will not count as an available resource for Medicaid purposes. See Medicaid Asset Protection Trusts. Additionally, if a child is receiving government benefits a parent may create a trust for their benefit which will not disqualify them from their benefits. See Supplemental Needs Trusts.
- Limiting Estate taxes. Depending on the type of irrevocable trust created assets may not be counted as part the trust creator’s gross estate for estate tax purposes. However, depending on the type of trust and size of the transfer, transfers to certain irrevocable trusts may count against an individual’s federal estate tax exemption amount or incur gift tax. Individuals with high-net-worth looking to lower estate taxes owed should consult with an experienced estate planning attorney to evaluate their options before proceeding with this planning.
Irrevocable trusts are governed by New York statute. The Trusted Counsel of Pierro, Connor & Strauss monitors the statute closely to ensure compliance with any changes in the letter of the law itself, how the courts apply it in current legal disputes, and if any changes are imminent. Our goal is always to give our clients the most up-to-date advice regarding the advantages and disadvantages of incorporating an irrevocable trust in your estate plan.
Creating an Irrevocable Trust in New York
An irrevocable trust created while a person is alive is called an inter vivos trust. An inter vivos trust can be created and funded immediately. Here are several examples are irrevocable inter vivos trusts:
- Supplemental Needs Trusts- A supplemental needs trust or special needs trust “SNTs” allows family members to leave money or property to a beneficiary with special needs without disqualifying the beneficiary from any government benefits they may be receiving. There are two types of SNTs first party and third party.
- First Party Supplemental Needs Trusts– A first party supplemental needs trust is created by the recipient of the government benefits and must be irrevocable. These types of SNTs must have a payback provision upon the recipient’s death to pay back the government for the care received during their lifetime.
- Third Party Supplemental Needs Trusts– A third party supplemental needs trust is created by a party other than the individual receiving government benefits. Unlike a first party SNT, a third party SNTs do not have a government payback requirement
- Irrevocable Life Insurance Trust “ILIT”- An ILIT can be created to be the owner and beneficiary a life insurance policy. Transferring life insurance to an ILIT can remove this from the policy holder’s taxable estate if it has been transferred three years before the insured person dies.
- Medicaid Asset Protection Trust Assets held in a Medicaid Asset Protection Trust not be includable as an available resource if the assets are held in trust for at least five years. This can help preserve wealth for future generations and avoid losing assets to long-term care costs.
Irrevocable trusts can also be created upon a person’s death through an individual’s Will. The creator of the Will or the “testator” signs their Will during their lifetime, which contain provisions for a trust to be created and funded upon the testator’s death. The trust that is created upon the death of the testator is known as a testamentary trust and it cannot be funded during the creator’s lifetime.
Speak with a trust lawyer today and start planning for tomorrow
Effective estate planning with Pierro, Connor & Strauss considers current wishes and your future goals amid a complex legal landscape. Call us today to speak with an attorney about the role an irrevocable trust may play in your future. We serve New York residents throughout the state, including the Albany area up to Lake Placid, Hudson, Long Island, all 5 boroughs of NYC.