Irrevocable Trusts: Protection, Control, and Tax Neutrality

[00:00:06]an irrevocable asset protection trust is a tool that we use to shelter assets as we plan for long-term care down the road there are many misconceptions about an irrevocable asset protection trust it's also called first of all a Medicaid asset protection trust and that's one of the confusing points when we're talking about an irrevocable trust that has many different titles um but for our purposes we'll call it an irrevocable asset protection trust and again it's a tool that we use when we're talking about protecting assets primarily the home as we age because we're concerned about long-term care needs down the road an irrevocable trust is a very believe it or not flexible document that allows the client to keep a certain amount of control and be secure at the same time under no circumstances does a client place all of their assets in into an irrevocable trust there's always a balancing act between what assets do we protect and what assets do we keep outside of the trust so we can use those assets and access them to live our lives an irrevocable trust is an essential tool within our Elder Care protection plan service and I'm going to share with you here 10 different points that we utilize to make sure our clients understand the benefits of implementing this type of a trust in their planning first of all it's important to realize that an asset protection trust an irrevocable asset protection trust will trigger what's called a look back period and that's a topic we talk about in our meetings every day of the week a look back period is the period of time where the Medicaid Program will look back at the person's assets to determine how did they become eligible for this Medicaid Program and if we're protecting your home for example that will certainly trigger a look back period now gratefully in New York we only have one look back period as of this filming and it is a nursing home look back period for five years there is also on the table out there a Home Care look back which is 2 and A2 years New York will be implementing this 2 and a half year look back period for Home Care at some point in the future what this means practically is that if we protect the client's home there will be a 5 year waiting period before nursing home Medicaid would be appropriate because of that look back period now if New York ever implements the 2 and a halfy year look back period for Community Home Care Medicaid benefits then again there'll be a 2 and a half year waiting period from the time of that trust being drafted signed and funded until the person would be eligible without any type of penalty for Community Medicaid Based Services in addition to this look back period one of the most important rules when we're talking about an irrevocable trust is that we have to protect what's inside that trust so that Medicaid won't be able to access it or recover against it and we simply call it here the no principle rule so when we're talking with clients about asset protection and these irrevocable trusts we must we must all be very clear on the idea of what the no principal rule is and rather simply whatever's inside that trust is called principle and that principle once transferred into the trust whether it's a house or $100,000 bank account that's called the principle and that principle can never under any circumstances be distributed directly back to the grant tour to the client setting up the trust that is necessary it mounts it might sound harsh but it's not I trust me I'll explain when we have the idea of asset protection we have to be careful to limit access of the client to what's inside the trust the concept is this if your trustee had the ability to give you $10,000 from the trust then you would have access to what's inside the trust and if you have access then so does Medicaid so we have to be careful and limit that access okay um in addition this rule isn't as as nasty as it sounds so to speak because we're not not going to transfer all of your assets into a trust like this you decide what to protect and what not to protect typically these types of trusts are fantastic for your primary residence or even a second home assets accounts will be left outside of the trust for you to live off of so you're not going to need what's inside the Trust In addition every trust like this is going to have a back door built into it so to speak and what that means is your trustee typically one of your children or a close friend would be able to distribute assets to people that you choose perhaps to your children or to a class of people so there will be a way to have assets pulled from the trust it just can't go to you directly and it can't be used for your benefit in any way and again it's a complicated point and we'll be happy to talk to you about it in person in addition and this is where it gets a little bit lighter as far as these topics and these points of understanding um every person that establishes a trust like this perhaps it's a husband and wife they will have the ability to reside in that home for the rest of their lives that it will be a protected black and white statement that I get to live here for the rest of my life so you're not going to get kicked out you're not going to be forced to pay rent the place is yours okay in addition that house can be sold if need be that's a question I usually get once we start talking about irrevocable trusts because a client will say well I want to move in a couple of years I want to do this I want to do that but rest assured you have the ability to sell the property within the trust all right so that trusted trustee that you're working with will work with you to sell the property and what happens is the house will actually leave the trust and the money from the purchaser will be transferred into the trust and that those sales proceeds are still protected okay you don't need a new trust and you don't need a new fiveyear look back period it's simply a trust transaction now the next point is that once you have that type of financial account or amount within the trust itself we have to talk about the concept of income because if you have Financial accounts in this within this trust they might be generating interest or dividends and that interest and dividends are considered income and as we build a trust like this you have to decide do I want that income distributed to me because we can do that we can build this trust so you still get the interest and dividends if needed but if you don't need interest and dividends the income then we allow that interest and dividends income to grow and accumulate within the trust okay it's a decision and a discussion that we have to have together um in addition uh we talk about a home there's real estate taxes there's homeowners insurance there's utilities the client the grant tour continues to pay those expenses all right so there's not going to be um the trustee the children aren't responsible to pay for those expenses for you the parents still pay those expenses and as a side note the idea of a trustee child being involved that child is serving as a trustee they're wearing a hat of different than being a child and what that means is that if God forbid something happens to your child that won't impact your trust all right so God forbid there's there's an illness or a premature death even a divorce um that will not have any bearing on the trust itself it is a neutral entity that is sheltered and protected from what goes on around it okay so back to the the trust itself um after the the expenses it's important to realize that a trust like this is a protective type of trust and it might be difficult to obtain any type of purchase mortgage or Home Equity Mortgage line of credit if needed there are certainly lenders that can do this but we always have our clients understand that you just can't walk into one of the larger Banks and obtain a home equity line because again this is a protective trust to protect your house all right another valuable point where our clients get to maintain control and security is that you pick a trustee that you choose and you have the ability to remove them if you so desire I'll give you an example let's say you do wish to sell your home here on the island in head south and your trustee refuses to sell you're actually able to remove that trust that trustee you can fire them and then the next one in line steps up or you can pick an additional trustee that you choose that will cooperate and assist in the sale of that property so you maintain that control year after year which is very comforting to our clients also another way to maintain control is that even though it's an irrevocable trust you are not locking in the beneficiaries for the rest of your life so perhaps you name three children as your beneficiaries and we've seen it at times where God forbid there's a falling out your still able to remove a beneficiary so you have the ability to disinherit if you unfortunately need to you also however on the positive side have the ability to add beneficiaries so you can add grandchildren you can add Charities you can change percentages you maintain all of that control within this type of an irrevocable asset protection trust the last talk uh topic to talk about briefly is the idea of taxes and as I share with our clients and as we share with our clients here the idea of this trust is that it is tax neutral as a trust itself it does not increase your taxes or decrease your taxes your taxes will remain the same so real estate taxes you will keep your exemptions in 99% of the cases in addition income taxes any income generated in that trust is taxed to you as the client just as if that money was sitting in your own account so again nothing changes and last it's important to realize that the capital gains tax benefits and exemptions remain so you're able to sell the property and keep that $250,000 exemption and your children under current law will receive that step up in basis when you ultimately pass away and they inherit the property from the trust I can't say enough good and positive things about the irrevocable trust and often when I'm sitting with clients and we go through those lists of benefits and terms they're actually relieved as to how much flexibility and control they keep of course there were rules and there are there were some strict guidelines as we've talked about and we can talk about them more in person but the irrevocable trust is certainly an essential part of everybody's estate plan as they age