Irrevocable trusts

[ahoyem8]

I have a widowed client who has been to her attorney several times to get a trust set up. She is thinking a standard revocable living trust but the attorney is really pushing an Irrevocable Trust. His recommendation is based on the following:

1. Estate taxes – Since the assets would not be in her name, they would not be subject to estate tax upon her death. Her current net worth is approx $1.7 million. I realize that no one knows for sure what the estate tax exemption will be after 2012 but it seems that the majority of experts believe it will NOT go back down to $1 million. Having said that, it is less than likely that she will have an estate tax problem at her death. Would you agree???
2. Medicaid Planning – By placing her assets in an Irrevocable Trust, they cannot be counted against her for Medicaid qualification. I have read a lot about this strategy and was never quite sure if this is bullet-proof or not. Can the state attempt to recover from the estate after her death? I understand the 5-yr look back issue.

Her biggest concern is that by placing the assets in the Irrevocable Trust she will lose ALL control and she really doesn’t want to give trustee authority to a 3^rd party (the attorney). She doesn't need current income from the assets but can this type of trust be set up to provide her with an income if she were to need it?

As I said, personally, I don’t see the Irrevocable trust doing much to mitigate potential estate taxes as I think she’ll ultimately be under the limit. The Medicaid question is one I just don’t fully understand. Any thoughts or experience with this type of situation.

[Bradly T.]

I work closely with Medicaid attornies and have been through several Medicaid "spend-downs". First, few attornies act as trustees - qualified ones will act as attorney for life for a single retainer including ALL trust work (sounds like an apportunity for high, perpetual fees and total control of client money). Second, Medicaid trusts as they're called are highly specialized and require very specific and changeable language - in our metro area of 1.5 mm and thousands of attornies, there are only 5 Medicaid specialists in practice and they're listed as such with the state bar -check out the attorney and get a second opinion!!! Third, depending on client need and income sources, $1.7 mm can easily yield $75,000/yr. without spend-down of ANY principal. If client owns home, she should consider selling and renting or downsizing or a reverse mortgage and utilize equity asset for eligibility as all states are now seizing homes by lien for "recovery" - if client is single or widowed. Fourth, most families select family members for such trusteeship (with the assistance of the attorney for life) - who's the client's beneficiaries and what might they think? Fifth, one could utilized a "just in case" irrevocable trust for a portion of estate and property/assets - like $500k if elderly, frail, Alzheimer risk, or other probability of care - leaving client control of most assets.....but I still wouldn't pick this attorney as trustee or trust creator without second opinion. Finally, good instincts on your part. Something stinks here.

[Lucullus]

The attorney recommends an irrevocable trust and himself as trustee?

Tell your client to find another attorney!!!

[the observer]

After many cases of elder abuse where attorneys basically spent the money leaving the senior penniless, some States now bar an attorney from creating an irrevocable trust for which he is also the trustee. I believe CA had a number of these and did just that... which State are you in??

BTW, I think it's still legal to have a disinterested third party lawyer not involved or associated with the firm that creates the trust be the trustee at the request of the senior because there are 6 degrees of separation and the lawyer drafting the trust has an obligation to explain the dangers to the senior but other than that, even if it is legal in your State, it's certainly not moral,ethical or proper IMHO. This should not be construed as legal advice...

[Bruce Steiner]

Why does she need either a revocable trust or an irrevocable trust?


Revocable trusts are overhyped and oversold, and in most cases are just a distraction. They don't save any taxes, and in most cases, despite claims to the contrary, they don't save much in estate administration expenses. There are some cases where they make sense, and they are common in some states, notably California, but for most people they're just a distraction.



If her estate is $1.7 million, estate taxes in her estate aren't a major concern. If the exempt amount reverts to $1 million, and she's comfortable making some gifts, she can make $13,000 per year annual gifts to her children and grandchildren (and their spouses, if she wants to include them).



Giving away her assets in case she goes into a nursing home 5 years from now doesn't seem to make much sense. Her income, including (presumably) Social Security, will probably cover most of the cost of a nursing home.



The thing that was missed here is that she should consider providing for her children in trust rather than outright, to keep the children's inheritances out of their estates, and to better protect their inheritances against potential creditors (including spouses). Each child can have effective control over his/her trust.

[Bradly T.]

Great post by Bruce!! I talk more families out of trusts than into them....or at least, guide them to the appropriate trust form for valid estate planning strategic outcomes. Trusts are not needed for probate avoidance....the most frequently cited need by trust mill attorney/snake oil salesman. And hiding over $1.5mm of estate assets for Medicaid eligibility is both dangerous and unethical and requires a total disbursement to an entity or persons resulting in the total loss of personal control of personal assets.


There remain, regardless of probate and taxation issues, many good reasons for considering multiple trust strategies for many different family situations and priorities. Probate ain't one of 'em.