Estate planning requires considering how your estate will be used and divided, and how your assets will be controlled. One option concerns the choice between revocable and irrevocable trusts. Although revocable trusts provide the advantage of modification, irrevocable trusts are valuable in their ways and are more flexible in other specific situations.
Here at Miller & Miller Law Group, we’ll answer the question “What is an irrevocable trust?”, explain how it works, and outline the advantages it can offer individuals and families in Brooklyn, New York.
What Is an Irrevocable Trust and How Does It Work?
An irrevocable trust is a legal arrangement where a grantor relinquishes ownership of assets in favor of the trust for good. Unlike a revocable trust, the terms of an irrevocable trust can’t usually be changed in any way after the trust has been established. This can only be done if all beneficiaries consent or a court permits such alterations.
An irrevocable trust removes direct control from assets by placing them in a trust managed by a trustee for the beneficiary’s sake. Estate planning incorporates these trusts for several reasons, including—but not limited to—protecting assets, planning for Medicaid, minimizing Estate taxes, and safeguarding the wealth for future generations.
For residents of Brooklyn, where the property market is highly priced, an irrevocable trust is beneficial in safeguarding assets from being liquidated for long-term care and maintaining eligibility for Medicaid.
Key Differences Between Revocable and Irrevocable Trusts
Understanding the distinctions between these two types of trusts is essential for making informed estate planning decisions:
Flexibility:
- A revocable trust allows the person who created the trust (the grantor) to modify or revoke the trust during their lifetime.
- An irrevocable trust is typically permanent and requires beneficiary consent or court approval for changes.
Asset Ownership:
- With a revocable trust, the grantor retains ownership, meaning assets remain vulnerable to creditors and lawsuits.
- An irrevocable trust transfers ownership to the trust, offering asset protection.
Tax Benefits:
- Assets in a revocable trust remain part of the grantor’s taxable estate.
- A properly drafted irrevocable trust can help reduce estate taxes by removing assets from the taxable estate. This is only necessary if estate tax is an issue when the person passes away.
Creditor Protection:
- Revocable trusts do not protect assets from creditors.
- Irrevocable trusts provide legal safeguards, shielding assets from potential claims.
Benefits of Setting Up an Irrevocable Trust
Irrevocable trusts are particularly valuable in Brooklyn, where estate planning is key to preserving long-held assets. Here’s why they are an essential tool:
Asset Protection
An irrevocable trust helps safeguard assets from creditors, lawsuits, and financial risks. For example, a business owner looking to protect personal assets from business liabilities can benefit from this type of trust.
Medicaid Eligibility
Planning ahead for long-term care is essential—especially when it comes to protecting your assets while qualifying for Medicaid. In New York, transferring assets into an irrevocable trust is a powerful strategy that can help individuals meet Medicaid eligibility requirements without spending down a lifetime of savings.
For nursing home Medicaid, New York imposes a five-year lookback period, meaning any transfers made within five years of applying could trigger a penalty period of ineligibility. That’s why early planning is so important.
However, for Community Medicaid, which covers services like home health aides and care in the home, there is currently no lookback period. This means that, as of the writing of this blog, individuals can transfer assets into an irrevocable trust and qualify for Community Medicaid as early as the first day of the following month, assuming all other eligibility criteria are met.
While changes to Community Medicaid rules—including the implementation of a 30-month lookback period—have been proposed, they have not yet taken effect. This gives New Yorkers a valuable window of opportunity to plan.
Estate Tax Savings
For those with significant assets, an irrevocable trust can lower the taxable value of their estate, ensuring more wealth is passed to beneficiaries rather than being lost to taxes.
Wealth Preservation
This trust helps ensure assets are distributed according to the grantor’s wishes, protecting them from unnecessary taxation and legal claims.
Privacy Protection
Since assets placed in an irrevocable trust typically bypass probate, the distribution remains private. This is a key benefit in a city like New York, where financial privacy can be prioritized.
Can You Modify or Revoke an Irrevocable Trust?
Irrevocable trusts are renowned for their permanence and are designed to remain unchangeable once established. Yet, under certain conditions, modifications are possible. In New York, the Estates, Powers, and Trusts Law (EPTL) Section 7-1.17 allows for changes if all beneficiaries agree or, in some cases, with court approval.
Irrevocable trusts are often created to deliver substantial benefits, such as enhanced asset protection, shielding assets from creditors, and providing tax advantages. However, establishing such a trust requires careful planning to ensure it aligns with the grantor’s objectives and adheres to state regulations.
When circumstances necessitate changes, be it shifting family dynamics, updates in tax laws, or other unforeseen events, any modifications must strictly comply with the trust’s governing terms and applicable legal standards. These adjustments can be intricate, often involving negotiations with beneficiaries or securing court approval, adding complexity to the process.
Speak with a NYC Trust and Estate Lawyer to Understand Your Options!
Estate planning decisions, especially those involving trusts, require thoughtful consideration. If you’re asking, “What is an irrevocable trust?” it’s time to explore how it fits into your financial future.
Miller & Miller Law Group is committed to helping Brooklyn residents make informed choices about estate planning. Whether you want to protect assets, establish Medicaid eligibility, or reduce estate taxes, we’re here to guide you every step of the way.
Call us today at 718-875-2191 to schedule a consultation.
