Demystifying Irrevocable Trusts

Our clients tend to have many questions about irrevocable trusts. This may be because the term “irrevocable” frightens them. From its name, many people just assume that irrevocable trusts cannot be changed or modified at all. The concept of an irrevocable trust is also unsettling because, for individuals accustomed to having control over their finances, the permanence of an irrevocable trust can be daunting. Additionally, while most people understand wills, irrevocable trusts may have legal jargon and intricacies that many people aren’t familiar with. 

There are various types of irrevocable trusts, each designed for distinct purposes, such as asset protection, tax planning, or addressing special needs. In exchange for relinquishing control of assets, the settlor or grantor (the person who creates the trust) can gain certain benefits, including reduced estate taxes, protection from creditors and lawsuits, and potential access to government assistance programs (such as disability benefits) by reducing their assets. 

Because you functionally no longer own the assets in the irrevocable trust, they are not included in your taxable estate, which can help your family avoid significant taxes. The trust can also shield those assets from creditors or lawsuits that might diminish your estate. This can be particularly important for those in professions where there is a higher risk of lawsuits, such as lawyers and doctors.

Read on to learn more about how irrevocable trusts operate in New York.   

Placing Houses In Irrevocable Trusts

A question we are frequently asked is about houses that are put into an irrevocable trust. It is common, particularly in Medicaid planning, to transfer real estate to an irrevocable trust because Medicaid trusts typically provide that the grantor can reside in the property and can maintain all tax exemptions formerly afforded to them. An irrevocable trust can pay for house expenses like mortgage payments, utilities, and maintenance costs if the house is owned by the trust. The trustee, who manages the trust assets, can use trust funds to cover these expenses as long as they align with the trust’s terms. This makes the home an easy asset to protect since the transfer does not affect everyday use of the property. Houses placed in an irrevocable trust can usually be sold, but the terms of your trust agreement determine how you sell and what happens to the profits.

A concern that should be discussed with your Long Island trust attorney before transferring real estate to an irrevocable trust is if you have an existing mortgage and plan to refinance in the near future, and whether you think you may need to get a new mortgage or line of credit. You should be aware that your ability to use a trust asset, such as a home, as collateral may be impacted. 

What Expenses Can Be Paid By An Irrevocable Trust?

Your primary concern when setting up an irrevocable trust is likely what the trust can do for your beneficiaries. The terms you establish in the document determine how the trust dispenses assets to beneficiaries. You can use an irrevocable trust to pay beneficiary expenses, such as:

• Education – You can create a trust for the sole purpose of paying your heirs’ education expenses or include education as one of the approved distributions.
• Medical and health – You can establish a trust to specifically cover medical and health costs or include them among other beneficiary distributions.
• Housing – Whether paying for rent or a mortgage, housing expenses can be included in an irrevocable trust, along with utilities and maintenance costs.
• Living – You can set up an irrevocable trust to pay for your beneficiaries’ living expenses, including food, transportation, and clothing.

Can You Convert A Revocable Trust To An Irrevocable Trust?

A revocable trust can become irrevocable under certain circumstances. The most common scenario in which a revocable trust becomes irrevocable is after the grantor passes away. At this point, the trust’s terms typically prevent any further modifications. 

In some cases, the grantor may choose to convert a revocable trust into an irrevocable trust while still alive. This is typically done by amending the trust document to explicitly state that it is now irrevocable. All of the terms of the trust are also amended to meet the criteria of an irrevocable trust (limiting the changes the client can make to the trust thereafter).  This may be done for asset protection from creditors or lawsuits (depending on the situation) or to qualify for long-term care benefits under Medicaid.  The conversion of an irrevocable trust to a revocable trust would initiate a five-year lookback period for nursing home Medicaid eligibility under current law in New York. 

Some revocable trusts are drafted with provisions that automatically become irrevocable under certain conditions, where there is a compelling reason to have these provisions. For example, a trust may contain language preventing further changes if the grantor becomes incapacitated. Or a joint revocable trust between spouses may become irrevocable upon the death of the first spouse. Note: Typically, our revocable trusts do not contain these provisions unless a situation warrants them.

Can The Name Of The Trust Be Changed?

In New York, it is possible to change the name of an irrevocable trust with the written consent of all beneficiaries. After the name of the trust is changed, it’s important to retitle all trust assets to reflect the trust name change. 

In a related matter, New York has a relatively new law that allows you to amend irrevocable trusts through a process known as “decanting.” Decanting a trust involves transferring the assets from an existing trust into a new one with revised terms. This provision allows trustees to take the assets in an old trust and “pour them over” into a new one, which is where the term “decanting a trust” draws its name. The new trust can then incorporate necessary changes and updates. That allows the spirit of the original trust and the grantor’s goals to be sustained while improving the situation for the trust’s beneficiaries.

Contact Davidow, Davidow, Siegel & Stern

Here at Davidow, Davidow, Siegel & Stern, we have many years of experience in guiding clients through estate planning and the creation of irrevocable trusts. Contact us today to see how we can help you.