There are many different legal devices that can be used when you are planning your estate. A lot of people do not understand this, and this leads them to the belief that they can simply use do-it-yourself downloads to create their own wills.
In reality, your plan should be constructed to meet your specific needs. Each family is different, and the right way to transfer assets to one person may not be appropriate for the next. Plus, there are asset protection elements that can enter the picture in some instances.
An irrevocable trust of some kind can be the ideal solution when certain circumstances exist, and we will look at two of the reasons why you may want to use this type of trust here.
Estate Tax Efficiency
Financial success is a beautiful thing, but estate taxes can enter the picture if you are a high net worth individual. The federal estate tax carries a 40 percent top rate, so it can have a major impact on your legacy.
There is a federal estate tax credit or exclusion that is a dollar amount that can be transferred free of taxation. The remainder is potentially taxable, and in 2022, the federal estate tax exclusion is $12.06 million.
In addition to the estate tax, there is a federal gift tax, and the two taxes are unified. As a result, the $12.06 million exclusion applies to large lifetime gifts and the estate that will be transferred after you die.
If you are married to an American citizen, you can transfer any amount of property to your spouse free of taxation because there is an unlimited marital deduction.
Here in Connecticut, we have a state-level estate tax with a $9.1 million exclusion during the current calendar year, and the maximum rate is 12 percent.
Assets that have been conveyed into an irrevocable trust are no longer part of your estate for tax purposes. Taxation will eventually be an issue when the assets are distributed, but they can be passed along at tax discounts.
For example, one of these trusts is the generation-skipping trust. As the name would suggest, you skip a generation when you name the beneficiaries, so your grandchildren would be the beneficiaries of the trust.
Your children would be able to benefit from assets that remain in the trust throughout their lives, and they could receive distributions of the trust’s earnings. After their passing, your grandchildren would become the beneficiaries.
In addition to the estate tax and the gift tax, there is a generation-skipping transfer tax that is applicable on a large transfer to someone that is at least 37.5 years younger than the donor.
This tax would be applicable on transfers to your grandchildren, but there would be one round of taxation over two generations.
This is one of the irrevocable trusts that can be used to gain estate tax efficiency, and there are a number of others.
Nursing Home Asset Protection
A more common utilization of an irrevocable trust is to develop a financial profile that will lead to Medicaid eligibility. Medicare does not pay for a stay in a nursing home, but Medicaid will cover custodial care costs.
Since Medicaid is a need-based program, you have to divest yourself of personal possession of assets to gain eligibility. If you fund an irrevocable, income only Medicaid trust at least five years before you apply, the principal will not count.
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These are two of the reasons why you may want to use an irrevocable trust, and there are other objectives that can be satisfied through the use of this type of trust. When you work with our firm, we will explain your options and make recommendations based on the situation.
At the end of the process, your estate plan will accurately reflect your needs, and we will be available to make revisions if and when they become necessary.
You can schedule a consultation with a Glastonbury, CT estate planning lawyer from our firm if you call us at 860-548-1000, and you can use our contact form if you would rather send us a message.
Mr. Horowitz was awarded his Juris Doctor degree with honors from the University of Connecticut School of Law. While attending law school, Mr. Horowitz received the American Jurisprudence Award in Legal Ethics and the Nathan Burkan Award.
After graduation from law school, Mr. Horowitz continued his legal education at New York University School of Law where he received a Post Doctorate Law Degree in Taxation. He has also recently received a national achievement award.
Mr. Horowitz is admitted to practice before all the state courts in the State of Connecticut and the United States District Court.
Mr. Horowitz was selected for Super Lawyers in 2021.