When something is put into an irrevocable trust, it is something that is given away or 'gifted' to the trust.
- If the asset is like a house/stocks, then it has a cost basis. When the asset is gifted, the trust receives the asset and it has the existing cost basis. When the asset is sold, then capital gains would be due on that sale. If the owner while alive sold the asset, it would have the same capital gains due, no difference. If on the other hand the original owner held the asset and then died, the cost basis gets stepped up to the value at time of their death. So be gifting to the trust, one looses the ability for that cost basis to be stepped up at death. If the asset is cash, then it makes no difference. If the asset is an appreciable asset, then it may. In your situation, she would loose the stepup available on the house (assuming the house is worth more now or at time of death, then when it was bought).
- You'll hear different stories about rates for 'income', not to be confused with capital gains, I'm talking about things like stock dividends and interest income. If you look at the income tax rate tables compared to an individual, yes the rates do rise much more quickly than an individual. However, if an individual is in a high tax bracket, and assets are given to the trust, then the income tax on that income can be actually lower. This is particularly true if assets are stocks, and aren't spinning off a lot of dividends or interest. On the other hand, if the original owner is in a low individual tax bracket, and has a lot of CD's and bonds or rental properties, then the tax rate could be higher. If you pick your assets that are in the trust correctly, you can have a lower tax situation. This example is assuming that the assets, income, profit, are held in the trust from year to year, and not distributed. In your situation, you indicate that the assets are generating interest income, so you should look at the rates to compare what they are under individual, and what they would be under a trust. However, even if all 100K was generating 1% CD interest (=1K), it's not going to matter much one way or the other much, but you should run the numbers.
- As previously indicated, an Irrevocable trust has it's own taxid number, so there is another set of federal and state income tax forms to submit, and estimated taxes to bet paid. I've been personally doing a number of these for years, and find it quite manageable.....IF.....the individual is on top of things and asset mix complexity is kept reasonable. It could be a nightmare, with considerable churn in the assets, with many multiple accounts at different institutions. But that would be the same whether they are in a trust or not. If the record keeping has been simplified, this is not a huge workload at all. I have my trust taxes done long before personal taxes. If on the other hand you have to pay someone to do these taxes, then it's an added expense.
- If asssets are in an IRA or 401K, and if there are beneficiaries listed on the contract, then there is potential for it to be passed to the beneficiaries as an inherited IRA, which then elongates and spreads out the tax benefit. It gets much iffier and trickier if the trust is the beneficiary, you'll need to definitely get legal guidance and confirmation from the IRA company that both the plan can distribute to the trust, and the trust is set up with the correct language and beneficiaries to allow that to happen.
The other thing to think about, is that there is a 5 year lookback on gifts for Medicaid eligibility, and your mother is already 80. If she's extremely healthy and active, with longevity in the gene pool, then it might be worth it.
So net/net, there are differences between having the assets held in her name, versus setting up a trust. You/she should get professional tax guidance to make sure you understand exactly what will happen with the taxes and assets over her remaining lifetime. Think through the next 10 years, under a couple different EOL scenarios. Live healthy long time, live long time requiring personally funded assisted living and then maybe nursing home, live only a short timeframe. Quite frankly if her asset base is only 120K, (without understanding her monthly income and expenses) she may need every bit of that to pay for an assisted living facility somewhere.