placing home in irrevocable trust -- what to ask lawyer?

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rumney
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placing home in irrevocable trust -- what to ask lawyer?

Post by rumney »

Bogleheads,
My parents are on the verge of placing their home (their only significant asset) in an irrevocable trust. As my siblings and I will be named as trustees, we will be having a conference call in a couple of days with the lawyers. I've read up a lot on living trusts, but irrevocable trusts are a mystery to me. My parents are not very financially savvy, and I'd hate to see them make a bad decision here. Are there specific questions I should be asking the lawyers? My parents' primary motivation is to save the home in case one or both of them needs long term care.
Thanks so much in advance for your advice,
rumney
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celia
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Post by celia »

I don't know too much about irrevocable trusts either, except as to how it applies to special needs (disability). I believe the income tax consequences are different since there are no exemptions (trusts "live on" even after the people die). Taxes are filed on form 1041 instead of 1040. Do your parents still have to file income taxes? Does their state have a homeowner's exemption (correct term??) for property taxes and will they be able to keep the exemption? If not, the property taxes may increase.

I'm sure there are advantages as well as disadvantages so you need to find out what they are. (If there were no disadvantages, everyone would put property into an irrevocable trust. If there were no advantages, no-one would.)

Also find out how much the lawyer makes, I mean "charges", to put this trust together. (Possibly it's for his benefit, but I don't know enough either.) Hopefully some-one more knowledgeable about this will respond.
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Sheepdog
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Post by Sheepdog »

I know little about the irrevocable trust except for what I have read and what my lawyer said. The biggest problem for me, anyway, is that it is as it says, it is irrevocable. If there are changes in my life, it cannot be changed.
As far as the house is concerned, according to my Elder Law Attorney when we were planning our Living (revocable) Trust in 2005, the house is protected tor the spouse without an irrevocable trust. He did not recommend that we consider it. He said that the house, one automobile, and $75,000 is already protected from Medicaid spend-down requirements for the spouse and for the individual if it is possible that he/she might be able to return to that home at some point. The house, etc, would not be taken if one of us is able to or may be able to live there in the future. At least the house is already protected. Having only a possible $75,000 remainder is what gives me concern, especially for my wife. In regards to protecting the house for my heirs, that is not important to us. We feel that we should try to pay the nursing home costs ourselves as much as we can and not be a burden on the community to pay our expenses.
Are there specific questions I should be asking the lawyers? My parents' primary motivation is to save the home in case one or both of them needs long term care.
I would ask the lawyer 1. Why do we need it? and 2. What are all of the shortcomings would be for me, my spouse and my heirs with an irrevocable trust? What is the worst case scenario at which I (or my spouse and heirs) would regret having obtained it?
Jim
Last edited by Sheepdog on Thu Feb 03, 2011 9:35 am, edited 1 time in total.
Unless you try to do something beyond what you have already mastered you will never grow. (Ralph Waldo Emerson)
sscritic
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Post by sscritic »

Ask what type of irrevocable trust is being considered. There are many types.

Here are some questions:

1) What is the gift tax implications for your parents when they make a gift of the house to the trust?

2) Since the trust will own the house, the trust will have to pay the property taxes. How will the trust get the income for the taxes? Will the trust accept gifts from your parents? You said you would be a trustee, but who are the beneficiaries? Will the beneficiaries have to disclaim the gifts from your parents to the trust?

3) Will your parents have to pay market rent to the trust in order to continue living in the house now owned by the trust? If the trust lets your parents live there for free, are there gift tax considerations for the trust?

Just imagine that the house will now be owned by this new person, M. R. Trust. Think of all the questions that raises.
sscritic
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Post by sscritic »

A few more:

1) This is from memory, so you have to double check. I think you can only deduct property taxes on a property you own, e.g., if you paid the property taxes for your parents, you couldn't deduct it on your income tax return. Since the trust will own the property, your parents will no longer be able to deduct property taxes on their returns.

2) The trust will not get any homeowners exemption on its property taxes.

Note: I am presuming that this irrevocable trust does not have the same type of pass-through features of an revocable trust. Perhaps it could be structured so that all of these standard items are passed through to your parents instead of being retained by the trust. I don't know the answers, which is why these are questions for you to ask.
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rumney
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Post by rumney »

These are all great questions, none of which I know the answer to but will certainly try to find out. I very much appreciate all of your input on this and many other issues on this forum.

rumney
insurancerenegade
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Post by insurancerenegade »

Rumney,

You will need to talk to their homeowners insurance agent as well. They will need to have both the the trust (for the house itself) and themselves ( for constents and liability coverage) listed as named insureds on the homeowners policy. Many companies have trust endorsements to correctly structure the coverage.

Hope this helps,

Ren
Dianne
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Post by Dianne »

This is a legitimate Medicaid planning technique in many states. The details of the strategy will differ from state to state, but one permutation goes something like this: You transfer your house to an irrevocable trust that pays you the income for life. This allows you to live in the house indefinitely. After five years, you can apply for Medicaid nursing home benefits, and neither the trust nor the initial transfer will count against you. The trustee can then sell the house and invest the proceeds without having to spend the proceeds on your care (which is what would happen if you relied on the homestead exclusion instead). While you are in the nursing home, any interest or dividends produced by the trust must be used to help pay for your care, but the principal and capital gains remain in the trust and pass to your beneficiaries after you die.

There are a number of variations on this plan, depending on state law and the specific financial and health care circumstances. So I wouldn't be surprised if another lawyer doesn't recite the same details as me; I'm not the one giving legal advice here.

The plan has some negative tax consequences, as others have noted. But if the irrevocable trust means the children get a $300,000 inheritance instead of $0, they usually don't mind spending $50,000 or so on extra property and capital gains taxes.

Another drawback is that the trust is irrevocable, which means you can't change your mind later. It will require careful administration, which will be a hassle.

And then there is the fact that this strategy is about preserving an inheritance for the children while using public funds to pay for your care. Many people have moral issues with this. If the original poster does not wish to receive an inheritance under these circumstances, now is the time to speak up. However, let's please not discuss the public policy issues here.

Let me instead point out the client-focused objection to this plan: Preserving the children's inheritance sometimes involves loss of quality of life during the parent's lifetime. While that money is in the irrevocable trust, it isn't being used to supplement the parent's care. In some states (such as mine), there are alternate strategies that will allow the parent to qualify for Medicaid while still preserving funds to pay for things that Medicaid doesn't cover. For example, Medicaid will not pay for a private room. If you have some of your own money in a pooled trust, for example, you can upgrade to a private room while still using public benefit dollars to pay for the basic care. But a pooled trust means permanently giving up the children's inheritance, and the children of my clients often talk the clients out of doing it.
Larry Johnson
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home in irrevocable trust

Post by Larry Johnson »

Your question should be why would anyone other than a swami ever put an asset in an irrevocable trust. People change, times change, and there is no advantage over a revocable trust.
downshiftme
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Post by downshiftme »

And this also makes me want to ask the question, why would someone do this. To the extent that it is a scheme to get government benefits that your parents wouldn't otherwise qualify for, it may be within the rules, but it certainly isn't within the intent of the programs.
jhh9327
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Post by jhh9327 »

This topic has come up within my family as well and was hoping for any additional advice or comments. Quick background. My MIL became widowed 12 months ago. She is 64 years old. Owns a paid off home worth about $160,000 and has about $85,000 in retirement accounts, $100,000 in taxable accounts, and $20,000 in checking accounts. SS and a pension net her about $25,000/yr and she is still working earning another $20,000/yr. Her lawyer wants to put the home and the taxable account in an irrevocable trust for the medicaid reason along with avoiding probate. Any ethical argument against the medicaid avoidance is for naught and with her current mind frame will do more to push her towards wanting to do this rather than away from it (she's a very angry person towards the world right now). Her 3 kids would be the trustees and beneficiaries. They get along great so that part is a non-issue. The only cons the lawyer brought up was the initial costs ($2500 to him) and a few hundred dollars to have the house put into the trusts name. I've told my wife that can't be the only cons and she agrees and does not have a good feeling that this is the right move, but feels like she needs to bring a solid counter argument and alternative plan to the table if she's going to voice her objection to it. My MIL lives in (Western) NY if this helps.
Penguin
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Post by Penguin »

My friends had an interesting problem with putting a house in an irrevocable trust. They wanted to be eligible for Medicaid to pay for nursing home care. When they became infirm they decided they wanted to live at home and pay for in home care and thus were not eligible for Medicaid. They decided to get a reverse mortgage to pay for their in home care. They found out that the irrevocable trust was not eligible for a reverse mortgage! They then found out that it was possible to reverse the irrevocable trust! This was done at great expense.
Net result of all this manipulation was payment of $5000 to set up and take down trust with no change in circumstances.
Jon
Kelty
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Re: placing home in irrevocable trust -- what to ask lawyer?

Post by Kelty »

Penguin wrote (immediately above): "They then found out that it was possible to reverse the irrevocable trust!"

How was this done?
Can an irrevocable trust be reversed in any state?
What is the process?
Gill
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Re: placing home in irrevocable trust -- what to ask lawyer?

Post by Gill »

Kelty wrote:Penguin wrote (immediately above): "They then found out that it was possible to reverse the irrevocable trust!"

How was this done?
Can an irrevocable trust be reversed in any state?
What is the process?
I'm a little rusty on this question, but I know there are instances when an irrevocable trust can be terminated with the agreement of all parties interested in the trust which would include the grantor, the current income beneficiaries and all future remaindermen. The problem often arises that some of the interested parties are either infants, unborn children, or members of a class that cannot even be determined and, therefore, this consent can't be obtained. Also, in some states, approval of a court might be required. But, yes, there can be instances where the trust can be undone but it is not usually the case.
Bruce
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
Tamahome
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Re: placing home in irrevocable trust -- what to ask lawyer?

Post by Tamahome »

There have been a lot of good responses that I will not rehash. An irrevocable trust can be a great way of passing on assets, and it can have other benefits as well. There are also downsides which have been mentioned above. An important downside to delve into:

Are all of the children responsible? Is one likely to try to get his/her portion and force the sale of the house? No one on drugs? No worries, right? What if one accidentally hits someone in a car and kills them. Depending on the state and depending on the type of trust, some states will allow the person suing to get assets out of the trust. (If you need to avoid this, ask about spendthrift trusts that are designed specifically to avoid this problem.)

The best question to ask the lawyer is: What questions should we be asking you? What are concerns that we should have about this process. The lawyer will be able to answer specifically what the concerns are in the state. You are in part paying for the legal advice as to which option is best in your situation. Let the lawyer walk you through the laws of the state, as well as your parents' legal options.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.
Kelty
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Re: placing home in irrevocable trust -- what to ask lawyer?

Post by Kelty »

MBMiner and Dulocracy: Very helpful comments. Thank you.
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