Irrevocable Trusts: Alleviating Estate and Gift Taxes
An Irrevocable Trust (also referred to as Irrevocable Trusts) is exactly what it states it is. It is a trust agreement that can not be changed once it is executed by the interested parties (except in very limited circumstances that almost always require Court intervention). There are many reasons for setting up an irrevocable trust, and they come in various forms.
The creation of an irrevocable living trust and its subsequent funding thereafter can provide more immediate solutions to alleviate estate and gift tax concerns. If you relinquish all of your rights to the income and principal from the trust, as well as the ability to modify or change the terms of the Trust, the assets placed in the trust will not become part of the taxable estate.
The assets that can be placed within the Trust entity are quite far-reaching, and usually involve the placement of real property, and other financial accounts (i.e. stocks, certificates of deposit, bonds) so as to protect them from creditors and to save possible estate tax ramifications. The Trust is created by the Grantor(s) and is then managed by a Trustee (which should not be the Grantor or a spouse), who can be an individual or a company (i.e. trust company, bank). Their function is to preserve the assets for the benefit of those designated as both income and trust beneficiaries. As long as the grantor remains in the home, the property does not lose any property tax exemptions that were being claimed by the Grantor (i.e. Enhanced STAR, Veterans Exemptions).
It is quite common for a Medicaid Qualifying Irrevocable Trust to be created for the purpose of both asset protection and asset management, usually for the benefit of seniors who seek to qualify for Medicaid Benefits. The trust is an income only trust, meaning that the Grantor would only be entitled to any income realized from the assets placed in the trust corpus (i.e., interest from a CD, stock dividends).
Even though the Grantor cannot take the principal out of the trust (which is the whole purpose of the trust—namely to shield from nursing home or creditors), the assets can be sold (i.e., selling of real property, stocks, CDs) and the realized gain can be reinvested in the trust corpus.
Gifting is inserted in the terms of the trust so as to give significant gifting powers to the trustee for the benefit of the named beneficiaries for the payment of tuition, health care, maintenance, and welfare. This can include the purchase of a condominium for the benefit of the named beneficiaries. The gifting mechanisms will be inserted so as to utilize the Grantor’s annual gift tax exemption as well as her lifetime gifting exclusions. (NOTE: The exclusion limits will depend upon the year in which these gifts are made.)