Spring 2010 Newsletter

March 2010
Inside This Issue
Trust Planning – a Primer
Revocable and Irrevocable Trusts
Irrevocable Life Insurance Trusts
Spring 2010 Newsletter Trust Planning – a Primer

Exactly what is a trust? We use the term freely, and we see it everyday. Everywhere. However, what is it and what does it do? A trust is a device created by an individual, called a grantor, that allows the grantor to transfer assets from himself to another individual, called the trustee, to be maintained by the trustee for the benefit of another, and that person is called the beneficiary.

Why have a trust? There are many reasons, and the balance of this year’s newsletters will focus on the most common reasons and the most common types of trusts, as they apply to elder law. Most grantors create trusts for the following reasons: tax and estate planning, Medicaid planning, and charitable planning. We will discuss the basic types and the most common varieties of those types, so that you will have a better working knowledge of this extremely useful legal technique, and thusly, can decide if a trust is a good option for you and your family.

Revocable and Irrevocable Trusts

There are two major types of trusts: revocable and irrevocable. Revocable trusts, also commonly referred to as living trusts, are frequently created as a substitute for a Last Will and Testament. They are useful when an individual with assets has been diagnosed with a memory-impairing illness. While the grantor is still competent, she may create such a trust and fund it with her assets. Thereafter, she can direct how those assets are to be managed if and when she becomes incapacitated, and how they must be distributed after she dies.

This type of trust allows an individual to manage her assets before and after her incapacity and replaces the need for probate of a Last Will and Testament, if structured properly. In addition, it can be revoked or modified or terminated entirely, at the whim of the grantor. Accordingly, it is of no use to those interested in tax or Medicaid planning, by virtue of the fact that it is, by definition, revocable. They are not inexpensive, and a well-drafted power of attorney may serve the exact same purpose with a fraction of the up-front expense. Interestingly, living trusts have caught on in California and are a much more frequently utilized estate planning tool, there, than they are here in New York.

The irrevocable type is a much more favored-friend of the tax and Medicaid planning attorney. The rationale being that once the assets are transferred into a trust that the grantor may not amend, modify of terminate entirely, then those assets no longer belong to the grantor. As a result, that divestment allows the grantor to proceed as though he no longer owns those particular assets, thus availing him of a more favorable tax status or Medicaid eligibility status. Examples of types of irrevocable trusts include irrevocable life insurance trusts (ILIT), credit shelter trusts, personal residence trusts, charitable split interest trusts and the wildly popular special (or supplemental) needs trusts.

Irrevocable Life Insurance Trusts

Many are aware that the federal estate tax structure is sitting in a type of limbo. No one is certain of what will happen for sure, but it is a reasonable assumption that the federal estate taxes will not be phased out entirely, permanently. Currently, the federal estate tax credit for an individual is $3.5 million and the federal gift tax credit for an individual is $1 million. That means that once an individual transfers assets in excess of those credit amounts, taxes will be charged to that individual. (New York has a $1 million estate tax credit, and New York’s gift tax was phased out entirely several years ago, but we will not focus on state estate taxes in these newsletters. For information on local and state tax planning, please consult a local attorney.)

How does an ILIT work? Basically, a grantor creates a trust and funds that trust with cash which the trustee then uses to purchase premiums on life insurance policies. In the alternative, or in addition, existing policies may be transferred into the ILIT. Once the grantor dies – so long as three years have passed since the purchase of the insurance policy – then the policy proceeds pass to the grantor’s children, estate tax free. There may be federal gift tax ramifications, but creating the ILIT may still be worth while. An ILIT is a most useful tool for those with sizeable estates.

Our Summer Newsletter will continue with the presentation and examination of other irrevocable trusts, starting with Credit Shelter Trusts, so stay tuned…..

The above list is for general information purposes only. It is not intended to constitute individual legal advice or a specific recommendation to any particular client.


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