There are certain trusts that can be looked at as asset protection trusts for people that are exposed to the estate tax. These would be irrevocable trust, but there are other trusts that fit into this category that can be useful for other purposes. Since the names of these devices are wordy, they are often reduced to acronyms, and we will provide some decoding in this blog post.
One of these irrevocable trusts that is not exclusively tied to the objective of estate tax efficiency is the supplemental needs trust. Many people with disabilities rely on government benefits like Medicaid and Supplemental Security Income (SSI). The latter program is self-explanatory for the most part, and most people are aware of the fact that Medicaid is a source of health care insurance.
These are need-based benefits, so an applicant cannot gain eligibility with a significant store of assets in his or her name. As a result, if you want to provide for someone that is depending on Medicaid and/or SSI, you have to keep ongoing benefit eligibility in mind. There is a point of bifurcation at this point that we should cover so that you fully understand the lay of the land.
There is a type of trust called a supplemental needs trust that can be utilized under these circumstances. The trustee would be able to use assets in the trust to satisfy certain needs of the beneficiaries without violating any program rules. It would be possible for a parent, a grandparent, a trustee, or a court to establish this type of trust with the beneficiary’s own money.
As a result, it would be possible for you to give someone a direct gift that is used to establish a supplemental needs trust, which would be a first party special needs trust, That’s the good news, but the bad news is that the Medicaid program is required to seek reimbursement from the estates of people that used these benefits during their lives.
Because of this, if you go this route, Medicaid would absorb any remainder that is left in the trust after the passing of the grantor/beneficiary. To prevent this, you could establish the trust initially with your own resources. This would be a third-party trust, and assets that remain in the trust after the death of the beneficiary would be protected.
The estate tax exclusion stands $11.4 million right now, so if your estate is valued at more than this amount, you have to take steps to mitigate the damage. One type of trust that can be of assistance is the qualified personal residence trusts (QPRT).
Since we are covering a number of different devices here, we are providing short explanations. To execute this strategy, you place your home into the trust, and you name a beneficiary to assume ownership of it after the term expires. You are effectively removing your home from your estate for tax purposes, but the transfer would be exposed to the gift tax, which has the same rate.
When you establish the trust agreement, you set forth a term during which you will continue to live in the home as usual (which is called the retained income period). Let’s say that you choose to instruct the trust to allow you to stay in the home for 15 years.
No neutral buyer would pay fair market value for a piece of property that they could not possess for 15 years. The IRS takes this to into account when the taxable value of the gift is being calculated. Because of this, at the end of the process, the tax on the gift would be much less than the estate tax that would be applied on the immediate and direct transfer of the home after your passing.
The estate tax and the gift tax are applicable on transfers to anyone other than your spouse, as long as your spouse is an American citizen. If you are married to someone who is a citizen of another country, you could establish and fund a qualified domestic trust (QDT.)
Your spouse could receive earnings from the trust estate tax-free throughout his or her life if you do in fact die first. Portions of the principal could be distributed as well if you stipulate this in the trust declaration, but the estate tax would be applicable on these transfers.
After the passing of your surviving spouse, your final beneficiaries, presumably your children, would assume ownership of the trust. Transfer taxes would be a factor, but the resources would have earned income for a longer period of time while your surviving spouse was still alive.
We are here to help if you would like to learn more about advanced trusts or any other estate planning matter. You can send us a message to request a consultation appointment, and we can be reached by phone at 775-823-9455.