This is the third of three blogs (Saturday, yesterday, and today) on this important topic. I hope you find it helpful.
Ability to Specify Terms for Beneficiaries’ Use of Trust Assets
Many parents or grandparents desire to infuse their planning for their children or grandchildren with positive aspirations. Such goals may be as simple as that the gifts or bequests may only be used for the recipients’ education, to finance a career change or buy a home. Such planning goals of a client almost always indicate an irrevocable trust with beneficiary incentive provisions as the vehicle to implement the plan. This is completely compatible with Medicaid asset protection planning for seniors at the same time.
Ability to Decide Which Beneficiaries Will Inherit
The trust preserves the Trustmaker’s power to decide who within a designated class of recipients will receive the benefits of the trust, how much they will receive, and in what way they will receive it. The class of potential recipients can be as broad as everyone in the world except the Trustmaker and his or her creditors, and the Trustmaker’s estate and its creditors. Most often, however, the class of potential appointees consists of the Trustmaker’s descendants, certain other relatives or in-laws, and/or certain charities. By the way, this ‘power of appointment’ as it is called is sometimes referred to jokingly as a “power of disappointment” because it truly retains for the Trustmaker the power to disinherit someone who acts badly.
Ability to Determine Successor Beneficiaries
A major concern in Medicaid asset protection planning and estate planning in general is who will be the successor beneficiaries of anything a client leaves to someone. If the gift or bequest passes outright, the recipient has control through lifetime consumption of assets and income or through his or her estate plan, to determine who will receive anything that the initial recipient doesn’t use up. Of course, the recipient’s creditors or predators also may gain control over the assets and income gifted outright to the initial recipient. If the client would prefer to designate that only blood descendants, or descendants and their spouses, and/or certain charities will receive what is not consumed by the initial recipient, an irrevocable trust is a key instrument to create such a plan. This is true almost regardless of the initial size of the gift or bequest – if a modest amount of funds are left in trust, there may nevertheless be a remainder to pass to a successor beneficiary or even another successor beneficiary. This sounds like a “dynasty trust” and it actually is, even though it is of modest size. The point is that by use of an irrevocable trust, the client has the option to decide who the possible recipients will be, and even to grant limited powers of appointment to the named recipients in order to give them some control as well.
Analysis of Need to File a Federal Gift Tax Return for Year of Funding
A goal of many planners in design of irrevocable trusts is to make the initial trust-funding gift(s) “incomplete” for tax purposes. The purpose is generally to prevent the Trustmaker from having to file a federal gift tax return for the year(s) of the funding transaction(s), assuming that the taxpayer makes no other “taxable gifts” in any such year.
This three part series has tried to demonstrate that use of irrevocable trusts in Medicaid planning, as in other fields of estate planning, and how they might provides many opportunities to create great benefits beyond simply transferring assets. Some or most of these benefits may be achieved through the use of an irrevocable trust. If care is taken to include the desired provisions, an irrevocable trust can greatly enhance the value of your Medicaid planning beyond what can be accomplished through outright gifting.