What Is the Main Purpose of a Trust?
The answer to that question depends on the type of trust. There are literally well over one hundred different types of trusts. This short post will address the main purpose of one particular kind of trust: the irrevocable trust.
There are advantages and disadvantages of an irrevocable trust, and you’ll want to be fully informed before taking steps that may be costly to undo, explains the article “Understanding your trust” from The Sentinel. If your home is deeded to an irrevocable trust, you may not be able to make changes without getting permission from the principal beneficiaries named in the trust. Certain rights of ownership are transferred to the trust when you deed it to the trust. An irrevocable trust is usually a good advanced estate planning strategy for middle income clients, but you have to be aware of what you are doing. It is the responsibility of a good estate planning lawyer to explain the strategy in detail based upon your individualized concerns.
You can always maintain the right to live in the home using some peculiarities under Louisiana law if that is a purpose of the trust, but if you want to change a principal beneficiary, they may have to agree. Accordingly, an irrevocable trust is usually not a good idea if you want to keep open the option to switch beneficiaries. For example, some clients frequently switch out who will be the heirs or legatees under their will or trust. For them, an irrevocable trust would not be advisable.
However, if you are certain, for example, that you want to treat all three (3) of your children equally (give them 1/3 each), and you won’t deviate from that decision come hell or high water, then this “drawback” of irrevocable trusts is really no big deal. It’s not a drawback at all. The main purpose of the trust will not be affected.
Also consider the case of a home deeded to a trust with a mortgage on it. There was a time when lenders inserted clauses into mortgages that any time a sale or transfer of the deed occurred, full payment of the mortgage would be due. This changed, and today the mortgage is not due just because of a change in the deed. However, it may be a challenge to refinance, if the home is held in an irrevocable trust.
For most people, the main purpose of a trust is to protect the home into an irrevocable trust is to prevent the home from being lost to a creditor, including protecting the home’s equity from the cost of nursing home care, during life or after death.
The move to put a home into an irrevocable trust is often a great strategy, as long as the trust remains intact, even if the homeowner applies for Medicaid long term care before the five year “lookback period” expires. A complex calculation would have to be performed to ascertain if transferring the home to a irrevocable would be worthwhile and whether other important conditions apply. Sometimes, depending on the calculations, it will benefit the client, and other times it will not.
In Louisiana, when it comes to taxes, you are able to keep your property tax homestead exemption as long as certain conditions apply (it meets a certain purpose under Louisiana law), and the trust would allow you to qualify for certain income tax benefits. However, a poorly drafted trust could cause you to lose the homestead exemption and certain federal and state income tax benefits. In other words, if the trust is prepared by an experienced elder law attorney, it is likely that the capital gains on the sale of the home by the trust after the homeowner’s death will be taxed based on the home’s value at the time of sale, rather than the value at the time it is placed into the trust or on the day of death. If you think that you are not rich enough to be subject to estate taxes after you pass, think again. A poorly drafted trust can cause certain assets in your trust to be taxed very similarly to an estate tax.
If the home is the only asset in the trust, and other important conditions apply, the taxpayer ID of the trust will be the homeowner’s Social Security number, and no annual tax return is required. In other words, the main purpose of the trust will not be affected by income taxes, at least during your life.
An experienced estate planning attorney can explain the numerous strategies that can be used to protect your assets and your home from the high cost of long-term care. There are many Medicaid compliant techniques and tools, depending upon the situation of the individual and the family.
To learn more about more topics, read these articles: Will a QTIP Trust Work for a Blended Family? and Do Stepchildren Inherit? and What Is the Social Security Increase for 2022? and Some of Most Famous Estate Planning Mistakes
Reference: The Sentinel (April 23, 2021) “Understanding your trust”