irrevocable trust

What is the name of your state (only U.S. law)? Indiana
My widow mother is 80 and has been advised to set up an irrevocable trust with me as the trustee. It was recommended her house and some of her money be placed in the trust. Most of her 120,000.00 money is invested in interest bearing accounts such as CDs, mutual funds, annuities, & etc. Are all these type of investments allowed in an irrevocable trust? Is it just a matter of transferring ownership to the trust? She wants to proceed with the trust but is concerned what it may cost to manage the trust, especially attorney fees. Once the trust is established can it be managed without a lawyer? Will it be necessary to use a lawyer to perform duties such as add money, sell her home, buy another home, loan her money, and making distributions after her passing? Regards.

Once the irrevocable trust document is created and executed, and the tax id number is assigned, there isn't any typical legal item that needs to occur on an on-going basis.

Yes, all of those things can be put in the trust. These will be considered 'gifts' from your mother, since she is giving them away to the trust, and no longer has any control over them. She'll need to fill out a gift form since the gift total is more than 14K, but at that total amount you list she won't owe tax as she'll just be using up some of her unified credit. I think you'll need a lawyer assist with the house deed, but all the other typical investment assets should be easy.

When you go to the brokerage firm, you fill out the application form for a new account, using the irrevocable trust as the name, and its' tax id as the social security number. They'll want a copy of the trust document. Once the trust account is set up, she can tell them to just transfer the assets from account 123(non-trust) over to account 456(trust), and close 123 if she wants. Or, if she doesn't want to transfer everything at once, keep both open and transfer over time. I transfer assets annually (via letter to brokerage company), from my non-trust brokerage accounts, over to the irrevocable trust accounts I had set up. Similar process for banks setting up a new account for the CD's, etc.

The one additional piece of workload/expense, will be taxes. You will need to file a trust tax return (1041) each year for the taxid number, which handles any dividends or interest the assets earned, and any capital gains/losses that occurred if you sold assets within the trust. You will need to submit estimated taxes as well. My state doesn't require estimated taxes for the state estate tax (as long as everything paid in full by April15), you'll need to look into that yourself for Indiana. You'll most likely need a tax professional/cpa to do these federal/state trust taxes the first couple times, so that is an incremental cost to you. If you are tax literate, you may very well be able to do them yourself, if the taxable events you cause in the trust are similar to what the cpa has done in the past and you know how to handle them on the tax forms. Personally, I've done this myself for almost 20 years on a couple trusts, it's reasonably doable.

Of course you would want to use a lawyer at her eventual passing, to make sure you handle everything correctly with this trust, and probate on remaining non-trust assets.

Make sure that when she creates the irrevocable trust, that she allows for alternate/successive trustees. You never know what may accidentally happen to you, and the trust lives on and will need a trustee. Another family member and/or the trust dept of a bank as a backup.

The only reason to put such things in an irrevocable trust is as a Medicaid planning technique. However, if she still has rights to the assets they would not be outside the lookback period.

Also, there is the gift aspect kiawah mentioned. There would be at least one gift tax return required depending on the number of beneficiaries.

From a tax perspective, the trust will pay taxes at a higher rate (Unless made a simple trust and all income is distributed each year and the tax determined to be passed to the beneficiary.) and there will be no step-up in basis.

No one can say if this is a good idea or not. However, unless the recommendation was from an estate or eldercare attorney with experience in such matters and access to all the facts, I would be extremely suspicious of this plan. To accomplish the possible goals would take very careful planning and the documents would be fairly detailed and precise.

Reread edit:
Well, not the ONLY reason, but the main one.

The first question that needs to be asked is, "why does your mother think she needs an irrevocable trust?'. What is the purpose? Who recommended this for her?

reply to irrevocable trust question of Nov 8 2010

Sorry for the long delay in my reply. Thanks so much to all the advice.

My mother’s banker, and family friend, recommended a lawyer who specialized in estate planning, as she needed to prepare a new will. She, my sister, & I met with him and he recommended the irrevocable trust as a Medicaid planning technique. It caught us completely by surprise as we thought the discussion would be about a simple will, power of attorney, etc.

We think he is giving us good advice but we didn’t ask enough questions, as I said, we were completely surprised and somewhat is shock.

Let me explain. My parents had very meager income, about 14k per year. We have no idea how they were able to save 120k and pay off a house. Dad took care of all the finances and mom cannot give us any information. She is fine mentally but just wasn’t involved in their money.
There are 5 children. I, the oldest son, and a sister, the oldest daughter, are help her managing her affairs as this is all new to her. For that matter this is all new to my sister and I and it has been a long struggle trying to get things in order. We found investments all over the place, other states, etc. We feel certain things are under control and she is eager to move forward with the will & trust.

Mom is adamant about leaving money to her children. Us children are more concerned that she has a quality life and can be independent as long as possible.

The irrevocable trust that the attorney recommend seemed like a win-win for all and mom wants to proceed. The hang-up is our lack of understanding and the cost of asking the attorney any questions. The bill for the 1.5 hours was over 700.00. Our family has never used a lawyer and these fees are not something we are accustomed. The fee for the trust was about 2,000.00 with about 300.00 filling fees. Mom can handle this if we understand the benefits gained.

Back to the original question. Will a lawyer need to be hired to add money to the trust? We don’t see how she could afford a trip to the attorney every time she chose to give a few thousand to the trust.

Thanks for your help in advance.

Will a lawyer need to be hired to add money to the trust

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No


I add assets and money to my irrevocable trusts each year. Once the trust document is created, and the accounts are set up, it's easy. I write a letter each year (annual gifts) to the brokerage firm, instructing them to transfer X shares of ABC company stock and Y shares of the DEF stock from my personal account, and put into the irrevocable trust accounts I created for the kids. They execute when they get the letter, no charge. Trustee creates the crummy letters, get signatures, and files in a binder (if ever needed). Have also sent them a personal check, indicating to deposit into the irrevocable trust account, so they take deposit checks as well.

The trusts are just another account.

Win-win for all around? While certainly possible, at the very least, I suggest consultation with a tax professional for advice before proceeding.

question

Can you give me a hint why I should see a tax pro?

Thanks for the answers, I do appreciate it.

No step up in basis for the house. There has to be a decision on who pays the taxes on the trust's income--if it is distributed or not. Gift tax issues. Any annuity or IRA distribution may lose the right to be extended on the person who is receiving the property as a measuring life. Compliance costs for the returns and the accounting for the returns.

Just off the top of my head.

The attorney that recommend the irrevocable trust was an estate planner. Wouldn't he have taken all this in consideration when making the recommendation?

We were advised the trust would pay taxes, state & federal. My understanding was any individual inheritance under $100,000.00 would not be taxed.

I'm not arguing, just trying to get clarification.

There is no "inheritance" here, but a gift. There will be no step up in basis for the house. Fiduciary income tax rates ramp up quicker than individual so it is likely there will be a greater amount of tax owed on the income. There will be compliance costs to managing the trust.

Please re-read my first post in the thread.

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.

- 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.

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I agree with the proviso that a trust cannot live in a house. If the house was mother's personal residence she has owned and lived in for 2 of the last 5 years, she would get a Sec. 121 exclusion of $250,000 from having to pay capital gains on if sold. An *irrevocable* trust would not. If the house is a rental, we would have the recapture of depreciation issue.

- 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.

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As well, if in such a trust as the beneficiary, the RMD will be based on the oldest beneficiary.

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.

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To me, this is the only real, potential, benefit of such a plan. If a qualified attorney draws it up, I'm sure he will make sure to not give mother enough incidents of ownership to cause problems.

The bottom line is mom is giving away all her stuff. She is not in charge of it any longer. At all.

Thank you all again for the advice. Just recently mom has asked the children about dating in another 6 months. (One year after dad's death) She is declaring the first thing she wants is a pre-nuptial so her children get her money. Now the irrevocable trust seems more appropriate. Any comments?

No change. A pre-nup and revocable trust would accomplish the same thing except for the fact she could change either. (Medicaid planning is the only real/main reason for the irrevocable trust.)