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Irrevocable Trusts

Irrevocable Trusts to Reduce the Taxable Estate

The very wealthy are encouraged to continue to take advantage of the establishment of an irrevocable trust.  Many individuals choose to transfer life insurance to an irrevocable life insurance trust (ILIT).  If life insurance is transferred to a properly structured ILIT, then the insurance proceeds will be excluded from the taxable estate.  Charitable remainder trusts are another type of irrevocable trust used to reduce a taxable estate.  A charitable remainder trust makes current distributions to one or more non-charitable income beneficiaries and upon the death of the beneficiaries, the remaining assets in trust are paid to the charity or charities specified in the trust.

Protecting Assets Against Creditors

Using an irrevocable trust to protect your assets from creditors is usually referred to as a Domestic Asset Protection Trust (DAPT).  This type of trust can be established if you have potential creditor exposure, have assets that are potentially subject to creditors' claims, and you have assets you are willing to relinquish control of. Although you may retain some powers and interests in the trust, such as the power to veto a distribution and direct investment decisions, typically, a professional trustee is appointed.  Most individuals have difficulty trading the control of their assets for potential protection from creditors.

Eligibility for Medicaid

Individuals receiving Supplemental Security Income (SSI) are only eligible for Medicaid benefits if they keep their countable assets at or below $2,000.00.  Medicaid benefits will be disrupted if a recipient of SSI receives an inheritance or a lawsuit settlement.  However, Medicaid benefits can be protected by preparing a Special Needs Trust to hold the settlement payment.  Given the complexity and longevity of establishing and administering a Special Needs Trust, it is important to seek the advice of one of our experienced attorneys. –see Special Needs Trusts.

With an early diagnosis of dementia, Parkinson's Disease and Multiple Sclerosis, family members may have the ability to foresee the need for nursing home care years in advance. What some refer to as a “Medicaid trust” is a way to preserve assets from being spent on the cost of nursing care five or more years down the road. This type of irrevocable trust may cause significant tax consequences and should only be considered under the advice of our experienced Elder Law attorneys.

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