On the surface, an irrevocable trust speaks for itself: it is a trust that you cannot revoke or dissolve after it has been created. For the most part, this is true, and you may not feel very comfortable about the prospect of surrendering control over your assets.
At the same time, irrevocable trusts can be used to satisfy some important estate planning objectives. For example, there is the matter of taxation.
There is a federal estate tax that can be a source of asset erosion for people who have been able to accumulate a significant store of wealth. It is only a factor for high net worth people, because there is a credit or exclusion that you can used to transfer a certain amount tax-free.
For the rest of 2016, the amount of this exclusion is $5.45 million. Only the portion of an estate that exceeds this amount would be subject to the death tax. Inflation adjustments are applied each year when circumstances warrant an adjustment, so don’t be surprised if you see a slightly higher figure in 2017.
There are 14 states in the union that impose state-level estate taxes. In most cases, the state-level exclusions are lower than the federal exclusion. As a result, people can be exposed to state-level estate taxes even if they are federally exempt. Fortunately, here in California, there is no state-level estate tax. You could however face state-level estate tax exposure if you own valuable property in a state that does have an estate tax.
People who are exposed to estate taxes can use various different types of irrevocable trusts to gain estate tax efficiency. You surrender incidents of ownership when you convey assets into an irrevocable trust, so you are removing the assets from your estate for tax purposes when you fund this type of trust.
There are also certain types of irrevocable trusts that are used by people who want to protect assets from legal judgments. Once again, you would be surrendering incidents of ownership, so the assets would no longer be in your personal possession.
Estate taxes are something that most people do not have to contend with, but there is an eventuality that can impact your legacy even if you do not consider yourself to be extraordinarily wealthy. The Medicare program does not pay for long-term care, and most seniors will need living assistance before they pass away. Many will reside in nursing homes.
According to a United States Census Bureau study, almost 25 percent of the oldest old are residing in nursing homes. This term, “oldest old,” is used within the geriatric community to define people who are at least 85 years of age. About half of people who are at least 95 are receiving nursing home care.
Right now, nursing homes are extremely expensive, and the costs have been rising annually. Here in Sacramento, the median annual cost for a private room in a nursing home is almost $151,000. According to a Genworth Financial survey, this figure is going to rise by seven percent each year over the next five years. When you consider the upward trajectory, if you need long-term care in 20 or 30 years, the numbers can be astronomical.
The Medi-Cal program does pay for long-term care. However, since it is only available to financially needy individuals, there is a limit on countable assets. For an individual applicant, this limit stands at just $2000.
To get assets out of your own name so you can qualify for Medi-Cal to pay for long-term care, you could convey assets into an irrevocable Medi-Cal trust. Because of the fact that you do not have the power of revocation, the assets in the trust would not be counted if you were to apply for Medi-Cal to pay for long-term care if you ever need it. You can also continue to receive income that is earned by the principal of the trust if you implement this strategy.
It is important to be mindful of the 30 month look back when you are aiming toward Medi-Cal eligibility. To obtain timely eligibility, you have to fund the trust at least 30 months for you apply for Medi-Cal coverage.
For legal advice tailored to your personal circumstances, contact our office for an appointment. Our phone number is (916) 437-3500.
- Living Trusts and Incapacity Planning - March 31, 2020
- Estate Planning and Charitable Giving — Key Points - March 29, 2020
- Over-Funding Your Retirement Plan: A Potential Estate Planning Problem - March 27, 2020