Some of the most frequent questions I hear from clients in my estate planning law practice have to do with whether they should create an irrevocable trust.  Here are five questions to ask when deciding whether or not an irrevocable trust would be a good addition to your estate planning strategy.

1. What is your reason for creating an irrevocable trust?  Before jumping in to create an irrevocable trust, talk to your estate planning attorney about your goals.  The two most common reasons for creating an irrevocable trust are 1) to save taxes; and, 2) to preserve assets from the reach of creditors, including long-term care costs.  Some typical tax savings trusts include irrevocable trusts that hold life insurance, trusts that pass assets to charity, or that are used to gift assets to family members.  Irrevocable trusts that are created for long-term care planning purposes typically provide for an income stream to the trust maker but forbid any access to the principal of the trust.
2. Do you have the ‘right’ assets to fund an irrevocable trust?  If your goal is to preserve your assets against long-term care costs but your assets consist mostly of IRAs or other qualified retirement funds, transferring those accounts to an irrevocable trust is not a good plan.  The transfer of an IRA out of the name of the IRA owner is a taxable event.  For example, if you have a $500,000 IRA and you move it into the name of your irrevocable trust you will be deemed to have $500,000 of taxable income. This will mean an income tax bill in the neighborhood of $150,000 or so – not a good result.
3. Will you need to have access to the principal?  A hallmark of most irrevocable trust planning is that once you transfer an asset to the irrevocable trust, you cannot get it back.  Understandably, many people are reluctant to transfer their money or investments to an irrevocable trust.  Transferring your home to an irrevocable trust can be a good way to protect property from medicaid and preserve the value of the home from having to be spent down on long-term care costs without really impacting your day to day life.  You may continue to live the home and even pay all the bills.  If the property is rental real estate, you can continue to receive the net rental income.  However, if the property in the irrevocable trust is sold, you would not have access to the sale proceeds, which would continue to be held in the irrevocable trust.
4. What are the consequences of transferring your assets to an irrevocable trust?   Before transferring assets to an irrevocable trust, you should understand the consequences of the transfer on your estate plan and your inheritance planning. (See number 2 above.)  For example, even though the transfer of a home to an irrevocable trust will not result in an immediate tax consequence, there could be later tax consequences. Such a transfer may mean that the inheritors of the house will not be entitled to a stepped-up basis in the property when the trust maker passes away.  This may result in a significant capital gain tax upon the sale of the property that would have otherwise been avoided if the property had not been transferred or if the trust included certain provisions.  Similarly, if the home is sold while the person who transferred it to the irrevocable trust is still living, there may be capital gain tax payable on the sale that would have been avoided if the property had not been transferred to the irrevocable trust.  There can be non-tax consequences as well.  Transferring a home to an irrevocable trust usually makes it difficult to obtain a mortgage or home equity loan on the property.  This could impact the ability to make repairs or improvements to the property.
5. Is there another way to accomplish your goal?  Since creating and funding an irrevocable trust can be complex (and expensive), explore whether there are other options for achieving your desired result.  For example, gifting the home, vacation home, or rental property directly to children subject to the parent’s right to live in the property (typically called a life estate deed) rather than to an irrevocable trust, might be a better way to preserve that property from spend down for long-term care in your situation.  If your goal is to benefit charity, maybe a donor-advised fund through one of the larger brokerages may be a simpler, easier option than creating an irrevocable charitable trust.

As with all estate planning, whether or not a particular type of trust or other planning is right for you depends entirely on your unique situation.  Speak with an experienced estate planning attorney, a lawyer for wills and trusts, about your situation and your goals and don’t forget to ask the above five questions.

Attorney Suzanne R. Sayward is a partner with the Dedham firm of Samuel, Sayward & Baler LLC which focuses on advising its clients in the areas of estate planning, estate settlement and elder law matters. She is certified as an Elder Law Attorney by the National Elder Law Foundation, a private organization whose standards for certification are not regulated by the Commonwealth of Massachusetts. This article is not intended to provide legal advice or create or imply an attorney-client relationship. No information contained herein is a substitute for a personal consultation with an attorney. For more information visit www.ssbllc.com or call 781/461-1020.

July, 2018

© 2018 Samuel, Sayward & Baler LLC

In my estate planning and elder law practice, many clients express curiosity about Irrevocable Trusts, wanting to know what an Irrevocable Trust is used for and how it works.  Here are five things to know about Irrevocable Trusts.

1. An Irrevocable Trust has beneficiaries who have rights to the Trust property. It is a common misconception about Irrevocable Trusts that no distributions can be made from the trust.  That is not true.  Very often, a parent or grandparent will create an Irrevocable Trust for the benefit of a child or grandchild.  The parent or grandparent may want to make a gift but does not want the beneficiary to have unlimited access to the gifted funds.  This could be because the beneficiary is young, has a disability, or simply has not demonstrated good judgment in money matters in the eyes of the grantor (the person creating the trust and making the gift).  The grantor may also want the gifted assets to be protected from the beneficiary’s creditors.  The grantor will specify in the trust document when and for what reasons the Trustee (think “manager”) may make distributions from the trust for the beneficiary.  For example, the trust might direct the Trustee to pay the beneficiary’s education or health expenses. Alternatively, the trust may permit the Trustee to use the trust funds for the benefit of the beneficiary for whatever reason the Trustee determines to be appropriate.

2. Under some circumstances, an Irrevocable Trust can be amended. As a general rule, the person who creates an Irrevocable Trust cannot amend it.  However, some Irrevocable Trusts contain a provision allowing someone else to amend the trust.  For example, parents who have a child with disabilities will often create an Irrevocable Trust to ensure that the assets the parents leave for the child will not cause the child to lose eligibility for government benefits.  These trusts may include a provision permitting the Trustee to amend the trust if the law changes and impacts the trust, causing the child to be ineligible for such benefits.

3. The Trust creator can retain the right to change the ultimate beneficiaries. A person who creates an Irrevocable Trust can retain the power to change how the trust property will ultimately be distributed – this is called a power of appointment.  For example, say Mary creates an Irrevocable Trust that states that when she dies, the trust assets will be distributed to her three children in equal shares.  After the trust is created, Mary’s son Alan becomes embroiled in a nasty divorce.  Mary is worried that if she dies while the divorce is ongoing, that Alan’s one-third of the trust property could end up going to Alan’s soon-to-be-ex-spouse.

Even though Mary’s trust is irrevocable and she cannot sign an amendment changing the trust terms, Mary can change how the trust assets will be distributed at her death via her Will because she reserved a power of appointment over the trust assets.  A reserved power of appointment over the ultimate distribution of the trust assets allows Mary to change the distribution so that Alan’s share of Mary’s trust assets will not be reachable by Alan’s divorcing spouse.

4. The Trust creator may still be considered the owner of the assets in the Irrevocable Trust. When you transfer assets to an Irrevocable Trust, you may or may not still be the “owner” of the assets in the trust for tax purposes. Sometimes it is advantageous to be deemed to be the owner and sometimes it is not.  For example, life insurance is taxable in the insured’s estate for estate tax purposes if the policy is owned by the insured.  If the policy is large and the insured has a taxable estate, this means that between 10 and 40 percent of the life insurance proceeds will be lost to estate taxes.  If the insurance policy is owned by an Irrevocable Life Insurance Trust, then the life insurance policy will not be deemed to be owned by the insured and the proceeds will not be taxable in the insured’s estate.  On a $1 million life insurance policy, this could save between $100,000 and $400,000 of estate tax.

On the other hand, sometimes it is desirable to be deemed to be the owner of Irrevocable Trust property for tax purposes.  For example, say Harry has a total estate of $850,000.  He has a house that he bought for $30,000 many years ago and that is now worth $350,000 and CDs totaling $500,000.  Harry does not need to be concerned about estate taxes because his total estate is valued at less than $1 million and there is no Massachusetts estate tax on estates of less than $1 million (the federal threshold is $5,490,000).  However, Harry should be concerned about capital gain tax.  If he is not the “owner” of his house for tax purposes when he passes away, then when Harry dies there will be capital gain tax payable on the difference between Harry’s tax basis in the property ($30,000) and the sale price ($350,000).  The capital gain tax on $320,000 ($350,000 — $30,000) would be about $64,000.

If the Irrevocable Trust included provisions that caused Harry to be deemed to be the owner for tax purposes, then when the house is sold following Harry’s death, there would be no capital gain tax payable because the house would receive a “stepped-up” basis at Harry’s death.  This means the tax basis in the house is equal to the fair market value at Harry’s death.

5. The person who creates the Irrevocable Trust may be the beneficiary. Clients often assume that if they transfer assets to an Irrevocable Trust they give up all rights to the assets.  This is not necessarily true. A very common Irrevocable Trust used for long-term care planning is an Irrevocable Income Only Trust.  In this type of trust, the grantor (the person creating the trust) receives the income generated by the assets in the trust.  For example, let’s say that Jane owns a three-family rental property and is worried that if she needs long-term nursing home care, the property will be consumed by the costs of that care.  She doesn’t want to give the property to her children because she is worried about her children’s creditors (divorcing spouse, bankruptcy, tax lien, etc.).  In addition, Jane wants to keep receiving the rental income.  Jane can transfer the property to an Irrevocable Income Only Trust and continue to receive the net rental income.  After the five-year ineligibility period for gratuitous transfers has passed, the property in the Irrevocable Trust would not be deemed to be owned by Jane in the event she applies for Medicaid (MassHealth) benefits to pay for her long-term care under the current law.

These are just five facts to know about Irrevocable Trusts.  If you want to know more about whether an Irrevocable Trust is right for your situation, contact an experienced estate planning to discuss your goals.

Attorney Suzanne R. Sayward is a partner with the Dedham firm of Samuel, Sayward & Baler LLC which focuses on advising its clients in the areas of estate planning, estate settlement and elder law matters. She is certified as an Elder Law Attorney by the National Elder Law Foundation, a private organization whose standards for certification are not regulated by the Commonwealth of Massachusetts.  This article is not intended to provide legal advice or create or imply an attorney-client relationship. No information contained herein is a substitute for a personal consultation with an attorney. For more information visit www.ssbllc.com or call 781/461-1020. 

July 2017

© 2017 Samuel, Sayward & Baler LLC

After more than half a decade of uncertainly and speculation surrounding irrevocable income only trusts in the MassHealth context, the highest court in Massachusetts has decided to weigh in on the debate in deciding to review the Nadeau and Daley cases.  Hopefully a decision from the Supreme Judicial Court (SJC) sometime next spring will finally provide elder law attorneys and their clients with more defined guidelines as to what provisions these trusts may include in order to protect trust assets from liability for long-term care costs.

While the Heyn decision issued by the Massachusetts Appeals Court back in May 2016 marked the first precedential victory for irrevocable trusts since the 1990s, it left many questions unanswered.  Most notable was the question of whether language in a trust that explicitly gave the grantor (the creator of the trust) the right to use and occupy the home owned by the irrevocable trust made the property “countable” for the purpose of qualifying for MassHealth/Medicaid benefits in a nursing home.  As the property transferred into an irrevocable trust in the MassHealth planning context is often the grantor/MassHealth applicant’s primary residence, the right to use and occupy the home was beneficial to the grantor for many reasons including tax, mortgage and general notions of control and protection.  MassHealth has taken the position that an explicit right to use and occupy the property gives the grantor a level of control that makes the value of the asset “available” to the grantor.  The result of this “availability” is that the trust assets are deemed “countable” to the grantor which means the trust prevents the applicant from obtaining benefits since the assets exceed the MassHealth financial limit.  Alternatively, the property may be able to be returned to the applicant so that the state can place a lien the property and recoup the value of the benefits provided upon the applicant’s death.  This is the primary provision the SJC will review under the Nadeau and Daley trusts and it affects many, many seniors across the state.

While the two cases before the SJC are similar in that they both present the “use and occupancy” issue, they are different in ways that some elder law attorneys believe may yield a bizarre result. The Daley case deals with a life estate deed and an irrevocable income only trust while the Nadeau case focuses primarily on the use and occupancy provisions contained within the trust itself.  The Daley case also raises procedural and constitutional issues such as the inconsistency of administrative hearing decisions and other due process concerns.  In any case, the SJC has decided to hear both cases together and the decision will certainly provide more clarity on the use of irrevocable trusts in the future as well as how existing trusts will fare should the grantor apply for MassHealth benefits.

Stay tuned on the irrevocable trust saga as it continues to unfold over the coming year!

Pamela B. Greenfield