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Today it is not uncommon to see an estate plan that is comprised of a Will, a Revocable Living Trust, and an Irrevocable Trust. Irrevocable Trusts, if used properly can be valuable estate planning tools. Irrevocable Trusts are vehicles for holding life insurance policies, and other types of assets such as cash, or annuities. The goal of this type of Trust is to shift the ownership of certain assets away from a person, and place them in a vehicle which avoids or reduces the estate tax and penalty periods associated with benefits available through governmental programs like Medicaid (Title 19).
Irrevocable Trusts are commonly used as an asset protection technique. After a specific period of time has passed, these assets are not considered a part of your estate. When you die, the assets that are held in the Irrevocable Trust can then be distributed to your family, held in Trust, or used to purchase assets from your estate or from your Revocable Living Trust. If at the time of your passing the assets are owned by your estate, they would be part of your estate for tax purposes, and would pass through probate. However, because those funds have been placed in an Irrevocable Trust which purchased life insurance held by the Trust they will pass estate tax free to the beneficiary(s). Because these assets have been placed into a Trust, they will pass to your beneficiary(s) free from the fees associated with probating an estate and considerably quicker then if these assets were to pass to your beneficiary(s) through a vehicle like a Will or via Joint Tenancy.
An Irrevocable Trust is a legal entity separate from the person who creates it (the Grantor). It is created by signing a Trust agreement where the Grantor irrevocably transfers property (commonly cash, an annuity or an existing life insurance policy) to a third person called the Trustee (commonly the Grantor’s children or other relative) who holds that property in Trust for the benefit of the people who are named as beneficiaries.
If funds are transferred to the Trust and the Trust buys a new life insurance policy, the proceeds from the policy will be sheltered from estate taxation. The same would be true of cash or annuities that are used to fund the Irrevocable Trust.
The name of the game with an Irrevocable Trust is “Beat the Clock.” In this sense there are two clocks you are looking to beat. One clock is an IRS clock and the other and sometime the more important clock is the Medicaid clock. The theory here is that the assets (cash, insurance, annuities…) need to be out of your estate for a certain number of years for the assets to be considered not owned by you. In the estate tax sense this means that in order for a particular asset not to be included in the calculation for your estate tax the asset must have been out of your estate for three years prior to your death. In the Medicaid sense this means that for an asset not to be included in the calculation for Medicaid benefits, the asset must be out of your estate for five years prior to the time that you would need the benefits associated with Medicaid.
The most important move in this game of beat the clock is the first move, getting started. Once you establish an irrevocable trust and fund it the clock starts running, thus the sooner you move assets into the Irrevocable Trust the better.
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Estate Planning • Asset Protection • Charitable Planning • Probate Administration • Medicaid Planning • Premarital Planning