Federal Estate Tax
There is a federal estate tax in the United States, and it can have a significant impact on your legacy. This tax carries a 40 percent top rate, so we are talking about a very considerable bite.
We have a federal estate tax credit or exclusion. This is the amount that you can transfer tax-free. Anything that you want to transfer that exceeds the amount of this exclusion is potentially subject to the estate tax.
In 2014, the exact amount of the federal estate tax exclusion is $5.34 million.
When you have an irrevocable trust, you are surrendering incidents of ownership, because you cannot revoke the trust. Because you divest yourself of direct personal ownership of the assets in the trust, generally speaking, they would not be part of your taxable estate.
This is why irrevocable trusts are often utilized for tax efficiency purposes.
It should be noted that we have a federal gift tax that is unified with the estate tax. If you convey assets into an irrevocable trust for the benefit of someone else, there could be gift tax implications. This is a matter that we will examine in a different post.
Irrevocable trusts can also be utilized for asset protection purposes. We live in a litigious society, and many people are looking for what they consider to be “deep pockets targets.”
You are surrendering incidents of ownership when you convey assets into an irrevocable trust, so there are certain types of irrevocable trusts that are used by people who want to protect their assets from creditors and claimants.
Many elders rely on Medicaid to pay for long-term care, because Medicare will not pay for long-term custodial care. Medicaid is a program that is available to people who can demonstrate significant financial need.
People with resources who want to qualify for Medicaid often engage in a process called a Medicaid spend down. When you spend down, you spend or give away assets before you apply for Medicaid. You ultimately have very little left in your own name when you do submit your application.
It is possible to convey assets into an irrevocable Medicaid trust as part of a Medicaid spend down. Because you don’t control the assets in the trust, they would not be counted by Medicaid evaluators.
Free Estate Planning Consultation
In this post we have taken a surface look at irrevocable trusts. If you would like to learn more about them, contact our firm through this link to request a free consultation: Grand Forks ND Estate Planning Attorney.