If you plan to move states, can you take your Medicare or Medicaid plans with you? The answer depends on whether you have original Medicare, Medicare Advantage, or Medicaid.
While the two main types of trusts, revocable (also called “living”) and irrevocable trusts, differ in how they are structured and taxed, both types of trusts are tools for setting aside assets and distributing them according to specific wishes and instructions. They can protect one’s property, safeguard a family’s financial future, and provide tax-saving strategies.
As the name suggests, an irrevocable trust, once established, can’t be canceled or revoked. The person creating the trust, sometimes called the “grantor,” transfers assets into the trust and permanently gives up all claim to them. A trustee is appointed to carry out the instructions spelled out in the trust. No changes to the terms of the trust can be made without the consent of the trust’s beneficiaries.
In contrast, a living trust offers more flexibility. The grantor of a living trust still owns and controls the assets and can make changes at any time. A living trust also has a trustee, someone who would take over management of the trust if the owner is no longer capable of doing so.
Both types of trusts offer tax advantages, although these differ in key ways. An irrevocable trust is considered a separate entity and must have its own tax returns filed annually under its tax ID number. Irrevocable trusts can incur additional costs if a CPA is needed for tax preparation. Because it is a trust and not an individual, the irrevocable trust can’t qualify for the various deductions and exemptions that individuals can claim on their returns. Also, higher rates apply at lower income levels. For example, an irrevocable trust is subject to the highest federal tax rate of 37 percent if its income exceeds $12,500, a much lower ceiling than for individuals.
Assets within a living trust are still considered the property of the trust owner. Any income earned from this trust is filed along with the owner’s other income. Also, the assets of the trust belong to the owner’s estate and are taxed accordingly on the owner’s death. For this reason, wealthy families may choose to transfer a portion of their assets into an irrevocable trust to keep the value of their estate below federal and state exemptions.
Protecting Assets in the Future
One key advantage of irrevocable trusts is that their assets are protected from lawsuits and creditors. A living trust offers no such protection, because the trust assets are still part of the owner’s property.
A living trust is an option for someone who doesn’t need all the layers of protection but still wants to set up some provisions for the future. A living trust works well to set aside assets in the event that the grantor becomes unable to manage his or her finances in the future, due to illness or old age. With a living trust, the grantor controls the property while he or she is competent, but a trustee can take over this function if the grantor loses this capacity.
If you have other concerns, such as estate tax planning, protection from creditors, or providing for a special needs family member, Frankel Estate Planning & Elder Law, LLC will help you find an appropriate solution for your particular circumstance. Please contact us at (610) 897-8994 to schedule a consultation so that we can help you acheive your goals.
Keep in mind that this is general advice only and that specific situations may be treated differently.