Trust entities have been employed for hundreds of years for many purposes. During my professional career, different types of trusts have gone in and out of favor as peripheral legal and planning situations have come to the fore. Though revocable trusts have been quite common throughout, irrevocable trusts were generally reserved for people of means who were able to permanently relinquish assets and even income. Well, in the past generation or so, the common application of irrevocable trusts amongst mainstream society has expanded greatly.
It is important to realize that trusts can be drafted in many forms and can be very flexible. The main parties to trusts are the grantor or settlor, the trustee or administrator and the beneficiaries. Generally, trusts are either revocable or irrevocable, can be disregarded or very rigid for tax purposes, are created to preserve assets and distribute income and even protect those who are or may become disabled. And there are many other benefits one may realize from using trusts. But they also can be a real nuisance, in hindsight.
As the term suggests, revocable trusts can be altered. Frequently, revocable trust beneficiaries and trustees are changed. During the grantors life, the grantor is often the trustee as well. The assets in the trust are typically deemed to be the property of the grantor in those cases. In general, revocable trusts are transparent, fluid and can be modified or terminated.
On the other hand, irrevocable trusts are usually very restrictive in terms of access and continued ownership by the grantor. And though possible variations include details beyond the scope of this discussion, most irrevocable trusts are set into stone once executed. Unlike the revocable version, the trust language affords very little, if any, modification of parties or terms.
So why has the irrevocable trust evolved into a common tool for more people? It’s clear to me that asset protection is still the underlying objective. But unlike decades ago, the real catalyst is the unnerving prospect of long-term illness and nursing home expense. In fact, its fair to say that the majority of retirees have only one concern that could annihilate their retirement and estate plans…and that is long-term care. Chronic medical care expenses can reach $150,000 per year and more. And waiting until a family member has received a dire prognosis makes planning to shelter assets very difficult.
Enter the irrevocable trust. Though conveying assets to the trust is usually permanent, many retirees are making irrevocable transfers of the family home into a trust. And depending on the volume of other assets and income, additional transfers may be delivered to the trustee. Once conveyed, 60 months must normally elapse after transfers into trust before the system will consider those transfers to be immune from medicaid inclusion. As mentioned above, revocable trusts are typically deemed to be owned by you. As such, they will not help you insulate assets during your life. So the threat of losing the family home and other assets to medical expense has induced irrevocable transfers with the hope that 60 months will pass without chronic, debilitating diagnosis.
Please recognize that trust design and trust uses are extremely complicated and that after execution, unexpected problems may ensue without possible recourse. If you are contemplating any advanced estate planning, it is advisable to seek expert legal and financial guidance and ask many questions before executing the documents.
Securities offered thru Leigh Baldwin & Co, LLC Member FINRA\SIPC
Toomey Investment Management a boutique private wealth management firm partnering with mid to high net worth individuals, families and businesses.