Q: What is the difference between an Irrevocable and Revocable Trust?
A: An Irrevocable Trust is the only type of trust that affords creditor protection and there are aspects of it that can never be changed by you (without a “decanting” which is outside the scope of this article but in short is a legal process that is complex and results in a change to an Irrevocable Trust). The Irrevocable Trust is most commonly used in our practice to protect people from debts to creditors like nursing homes and Medicaid. Irrevocable Trusts are also the only type to help wealthy people lessen or avoid estate or gift taxes. All trusts (Irrevocable AND Revocable) result in the avoidance of probate. Revocable Trusts are generally recommended for people with assets in more than one state as well as those with privacy concerns.
Irrevocable Trusts are generally recommended for individuals over 55 years old OR very wealthy individuals (this information reflects the 2022 tax year environment).
Q: If I create an Irrevocable Trust, do I lose the right to my property?
A: This really depends on the type of Trust you are creating. Even among Irrevocable Trusts there are so many different types and ways to structure them. Most of our clients who are around 50 years of age or older are recommended an Irrevocable Trust that results in them not being able to use the money in the trust to supplement their daily needs. However, if real property is in the Trust they can always live in the property,
rent it out and collect all income. The property can be sold with the Trustee signature and invested or used to purchase another real property. If real property is transferred to the trust it will be difficult to refinance but home equity loan eligibility is typically not impacted. You can continue paying all mortgage and other obligations on the property.
Q: What happens to my income taxes and property tax/property tax breaks if I set up an Irrevocable Trust?
A: As all things in the law, it depends. The typical trust recommended and used by individuals who do not have a very large net worth (again reflecting 2022 and subject to change with changes made by congressional law), will be a “defective irrevocable grantor trust” which means that the IRS will ignore it; the Trust will not be a separate reporting entity and that all tax reporting, tax breaks, taxes paid, etc will remain the same. You will report any income and will be permitted the same tax exemptions as before setting up the Trust. The property tax break for older or disabled individuals will remain. Similarly, your $250,000 (or $500,000 for married couples) income gain disregard on the sale of a primary personal residence in New York will also remain unchanged.
Q: If I am 55 or older, own a home and live in New York, why would I benefit from a Trust?
A: New Yorkers age 55 and over are at high risk of high medical bills, nursing home bills and the need for long term care at home, rehabilitation center or a skilled facility like a nursing home. It is very common for their savings and resources to be depleted and then the medical provider becomes a creditor, placing a lien on your home. In order to protect your property, such as your home, you should transfer it into a trust. We typically say 55 or older because once a person is 55 and has Medicaid, Medicaid must keep a record of all expenditures for your care and then recover for the last 10 years of your life upon your death or place a lien on your home while you are alive. Also, there is a 60 month (or 5 year) lookback for protection against nursing homes from the day you transfer your home into an Irrevocable Trust. This means that Medicaid will not cover nursing home expenses for a certain period of time if a transfer/gift was made within 60 months of applying for nursing home Medicaid coverage. There is also a new lookback of 2.5 years (30 months) for Medicaid homecare coverage that has been legislatively enacted but will not be implemented until April 2024 (or some other month in 2024 as there is no final decision yet made).
Q: What is a Trustee?
A: A Trustee is the representative of the trust and typically has broad powers over the trust property but every trust is unique and powers of the trustee can be limited. A trustee is akin to a power of attorney. The trustee must follow all of the rules in the trust. For example the trustee can be directed to distribute all income from the trust property to the individual who created the trust (often referred to as the Grantor or Settlor), or distribute the principal in various portions, etc. You can act as your own trustee in a Revocable Trust. The trustee does not have to be the same person as the beneficiary (the beneficiary is the person who received the trust property or benefits from it in some way). Sometimes, people hire professionals to act as their trustees especially if they are wealthy or don’t have individuals they can trust within their circle of friends and family. For any other questions concerning trusts or estate planning please contact us via our website or at our office: 347-699-5529.
Irina Yadgarova,
Esq. Law Offices of Irina Yadgarova PLLC
Elder & Estate Associates
