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Why an irrevocable trust can be superior to gifting

August 30, 2011

Filed under: Estate Planning,Featured Posts,Medicaid Planning,Trusts,Veterans Benefits — Andrew Sykes @ 4:19 pm

Wise use of an irrevocable trust can be a powerful way to protect assets as one gets older. One use is to avoid the need to spend down assets in order to qualify for certain benefits, such as veterans benefits and Medicaid.

But why use a trust? Why not just give the money away?

If a client is trying to protect assets and still qualify for government benefits, one strategy is to gift away excess funds to someone outside the household, typically children or other family members. The client then applies for veterans benefits, or in the case of Medicaid, waits five years before applying for benefits.

That strategy poses a number of significant risks. The person to whom it is gifted could die, become divorced, spend the money, invest the money in an unwise way, lose the money to creditors, and so on.

Even if the person making the gift were healthy when the gift was made, a health crisis could bring about the need for nursing facility care during the five years following the gift. If the gifted funds have been lost or spent, there could be no way to cure the gift. Without Medicaid benefits, there may be no way to pay for care.

An irrevocable trust has a number of advantages over an outright gift.


Simply having the funds in a trust provides a superior amount of control over an outright gift.

In addition, the person who creates and funds an irrevocable trust (called the “grantor”) can make a number of important decisions about how the funds are held, managed, and disbursed.  The grantor can name trustees, and decide whether to have a single trustee, followed by successor trustees, or co-trustees. The grantor can name beneficiaries and retain the right to change beneficiaries through a power of appointment in the grantor’s will.

A trust protector can be named, with the power to approve or disapprove distributions during the grantor’s lifetime. The grantor can decide whether there will be one trust or a number of trusts, and can stipulate what assets will be used to fund each trust.


The grantor can decide to receive income from the trust, even if there is no access to principal. Having income makes grantors feel as if the money is still theirs in some way, thereby easing some concerns about establishing an irrevocable trust in the first place.

Income can also help the client make it through a five-year look-back period by providing a means to help pay for care.

Protection from loss

By far one of the biggest concerns about gifting away funds is that the recipient (or “beneficiary”) will lose it in some way. With the right drafting, though, the funds placed into an irrevocable trust will not be available to be lost in a beneficiary’s divorce or bankruptcy proceeding.

Using a trust avoids the risk that a beneficiary will die and that the funds will be distributed to the beneficiary’s heirs.

Spendthrift language can help prevent the money from going to a beneficiary’s creditors, or from being squandered by a beneficiary who cannot handle money due to bad decision-making, gambling problems, addictions, or other reasons.

Tax advantages

An irrevocable trust offers some tax advantages over an outright gift, primarily in the area of capital gains tax. If the trust is structured as a grantor-type trust, then appreciated assets, such as a stock portfolio, can receive a favorable step-up in basis upon the death of the grantor. If such an asset were merely gifted, the recipient would have the same basis as the donor, and in many cases owe much more in capital gains tax.

Using a grantor-type trust provides a similar tax advantage for a homeowner’s principal residence. The estate can take advantage of the grantor’s capital gains tax exclusion under 26 U.S.C. § 121, which would not be available to heirs if the residence were gifted during the lifetime of the owner.

Weighing the options

Whether to create an irrevocable trust in any particular situation requires a careful assessment of the client’s objectives, assets, income, health and care needs, family dynamics, and other considerations. It can work well in the right circumstances, but it’s always best to consult with experienced legal counsel to make an informed decision.

What is an intestate estate?

August 19, 2011

Filed under: Estate Administration — Andrew Sykes @ 4:20 pm

If you die without a will, the state will say who gets your estate.

In Pennsylvania, where I practice, the state has a set of rules for what’s called your “intestate estate.” (Our rules are similar to those in other states, but check the law where you live.)

But what is an intestate estate?

Pennsylvania defines it as “all or any part of the estate” of a deceased person that is “not effectively disposed of by will or otherwise.”

If you die with a will, hopefully it will take care of all your property, especially if it is drafted well. But it might not, for various reasons. For example, your will might leave some portion of what you own – or maybe all of it – to someone who dies before you do. That’s why you might have some or all of it “not effectively disposed of by will.”

On the other hand, what you owned could have been disposed of “otherwise” even if you didn’t have a will. Jointly held property, for instance, passes directly by law to the surviving owner if it is owned with a right of survivorship. (It’s different, though, if multiple parties own property as “tenants in common.” If one of the tenants dies, that tenant’s share is treated as owned by him or her alone.) Also, many accounts have beneficiary designations, which likewise pass property directly to the beneficiaries without going through a probate estate.

So an intestate estate is what was owned by the deceased in his or her own name, or as a tenant in common, and wasn’t given to an existing beneficiary through a will or other legal arrangement.

Who gets the intestate estate? Stay tuned – I’ll address that in later blog posts.

“20 Common Nursing Home Problems – and How to Resolve Them” – guide available

August 17, 2011

Filed under: Elder Law - General,Medicaid Planning — Andrew Sykes @ 4:20 pm

You can download free, or buy copies of, a useful guide to nursing home problems produced by the National Senior Citizens Law Center. Just click here.

The guide covers problems in areas ranging from admissions and payment to care-related issues and evictions.

Each topic begins with “What You Hear” answered by a brief statement of “The Facts.” Here are a few examples:

What You Hear: “We can’t admit your mother unless you sign the admission agreement as a ‘Responsible Party.’” The Facts: A nursing home cannot require anyone but the resident to be financially responsible for nursing home expenses.

What You Hear: “Medicaid does not pay for the service that you want.” The Facts: A Medicaid-eligible resident is entitled to the same level of service provided to any other nursing home resident.

What You Hear: “You must leave the nursing home because you are refusing medical treatment.” The Facts: Refusal of treatment, by itself, is not an allowable reason for eviction.

Each topic then contains a detailed explanation of the law supporting the patient’s rights.

The guide is a highly readable resource for patients and their families. But as the guide cautions, it is “not a substitute for the independent judgment and skills of an attorney or other professional. If you require legal or other expert advice, please consult a competent professional in your geographic area.”

Can you transfer auto title without a probate estate?

August 13, 2011

Filed under: Estate & Trust Admin Featured Posts,Estate Administration — Andrew Sykes @ 4:21 pm

Whether or not there is a probate estate, title can be passed to others by submitting the right forms with the Pennsylvania Bureau of Motor Vehicles. (Procedure in other states may be different.)

Form MV-39 contains detailed instructions on what you will need to submit, which varies depending on how the car was titled.

Keep in mind that to pass title using that form, all of the deceased person’s debts must be paid and you will need to submit proof of death (either an original death certificate or the certification of an attending physician or funeral director on the Form MV-39).

What is a Community Spouse Resource Allowance? 5 simple steps to estimate

August 8, 2011

Filed under: Featured Posts,Medicaid Planning — Andrew Sykes @ 4:22 pm

A Medicaid applicant’s spouse shouldn’t become impoverished, according to federal law.

One protection for the spouse is the community spouse resource allowance. (Another is the monthly maintenance needs allowance (or MMNA) which you can read about here.)

The community spouse resource allowance (CSRA) gets its name because it is an allowance of resources (money or other assets) that the community spouse (the husband or wife of a Medicaid applicant) can keep and not have to spend down to qualify for benefits.

The CSRA is usually applied for after the applicant enters a nursing facility, and is based on what the couple’s resources are worth on date of admission. In general, the CSRA is half of the couple’s resources, after excluding those that are exempt under Medicaid rules.

Here is how to estimate a CSRA, in five simple steps.

1. Make sure the applicant’s spouse meets the definition of a community spouse. If so, proceed to the next step. If not, the spouse is not entitled to a CSRA.

2. Figure out how much of the couple’s combined assets are exempt. You can read about the most common exempt assets here.

3. Then take the couple’s remaining assets – those that are non-exempt – and total them as of the date of admission to the nursing facility. Use account statements, real estate assessments, and similar estimations of value.

4. Divide the total from Step #3 by 2.

5. The result from Step #4 is subject to a minimum and maximum. Is the number less than $21,912? If so, then the CSRA is $21,912. On the other hand, is the number more than $109,560? If so, then the CSRA is $109,560. If the number is between $21,912 and $109,560, then your result from Step #4 is the CSRA. (These numbers change annually based on inflation. Find the most current figures here.)

This estimation is simplified a bit for several reasons. Not every possible exempt resource is listed in our blog post on that subject – some are too obscure to be useful in a general article. Date of admission is usually obvious, but could be tricky depending on an applicant’s circumstances. Determining value on a particular date can also require professional assistance in some cases. Nevertheless, these five steps should yield a useful estimate in most cases.

This calculation can also get tricky if the Medicaid applicant wishes to receive services at home through Pennsylvania’s Waiver program. It will be based on when the couple financially qualifies for benefits, which is too complicated for this blog post.

To make a precise calculation, and to make sure you are protecting all the assets you can for the community spouse, it’s best to see a qualified elder law attorney.

Can you undo an irrevocable trust?

August 6, 2011

Filed under: Trusts — Andrew Sykes @ 4:22 pm


That word concerns many people, despite the effectiveness of irrevocable trusts in protecting assets and avoiding probate.

It’s true that, in general, an irrevocable trust cannot be entirely undone by the person who created it (called the “settlor”), acting alone. But under the laws of many states, even an irrevocable trust can be modified or terminated if the settlor has the consent of other interested parties. (Most states have adopted a version of the Uniform Trust Code (UTC), which has provisions for modification or termination.)

In Pennsylvania, where I practice, the rule is: “A noncharitable irrevocable trust may be modified or terminated upon consent of the settlor and all beneficiaries even if the modification or termination is inconsistent with a material purpose of the trust.”

Here’s an example. Bob creates an irrevocable trust naming his son and daughter as beneficiaries, and funds it with $300,000 for the purposes of protecting assets from scam artists, designing family members, possible future creditors, and long term care costs; having help managing the funds as he ages; and avoiding probate.

Bob cannot unilaterally change his mind and take all the money back. Without the consent of his children, he cannot stop the money from being distributed at the time of his death. But if Bob and his two children all agree, they could terminate the trust altogether.

Why might they terminate the trust? Circumstances may have changed drastically or unforeseen events may have arisen. Despite Bob’s best planning, things will not work out the way he originally intended and it now makes sense to switch to another plan. But it could be for any reason. According to the rule, as long as the settlor and beneficiaries agree, they can change or end the trust even if doing so is inconsistent with the purposes of the trust.

If the trust is terminated, what happens to the money? Under the UTC and Pennsylvania law, the beneficiaries determine where the money will go. It could go back to Bob if the beneficiaries agree, but the beneficiaries have the final say in a termination by consent.

What if Bob loses his capacity to make decisions? Can someone else consent for him? Often, the answer is yes, depending on state law and on the arrangements made for Bob. In Pennsylvania, consent can be exercised by a guardian, or by Bob’s agent under power of attorney if it is a general POA or if the POA specifically provides the power to consent.

Can Bob retain rights short of modification or termination? Settlors of irrevocable trusts often do retain certain rights, such as the ability to remove trustees, change distributions to beneficiaries, and so forth. Retaining such rights often affects taxation of the trust’s income, so you need to know what you’re doing or have the advice of competent legal counsel. Frequently, rights are retained for the precise purpose of affecting taxation in a favorable way.

IMPORTANT NOTES: Under the UTC, these rules apply only to a non-charitableirrevocable trust. Modifying or terminating an irrevocable trust with a charitable component may require court action. The rules discussed above may be different in your jurisdiction, so check with legal counsel.

Payments to caregivers found deductible, Tax Court rules

August 3, 2011

Filed under: Caregivers,Elder Law - General — Andrew Sykes @ 4:23 pm

recent decision of the United States Tax Court reminds us that the some of the cost of caregiving for the chronically ill may be tax deductible, but that it is important to get the proper documentation.

It may also help if you file a tax return.

Lillian Baral suffered severe dementia and required assistance and supervision 24 hours a day, her doctor determined. Her brother arranged for caregivers to help her bathe, dress, travel to the doctor, take medications, and transfer to a wheelchair.

Although she had $94,229 in adjusted gross income for 2007, she did not file a tax return, nor did anyone file one for her. The IRS filed a substitute return for her, based on information from third parties, resulting in a tax bill of $17,681.

On her behalf, Lillian’s brother questioned the amount of the tax bill and claimed she could deduct her costs for caregiving, physicians, and supplies. In 2007, she incurred $49,580 for caregiver services, $760 for physicians’ services, and $5,566 for supplies obtained by her caregivers.

IRS rules allow a tax deduction for the medical care of a taxpayer, including “qualified long-term care services” for “a chronically ill individual.” Those services can include “maintenance or personal care services.” A deduction is allowed for the amount of such costs that exceed 7.5% of the taxpayer’s adjusted gross income.

But in this case, the IRS said Lillian had not met the requirements of showing a severe enough impairment, that the services were provided “pursuant to a plan established by a qualified health care professional,” or that the supplies were related to her care.

The Tax Court found that Lillian met the requirements to deduct her caregiver services because her doctor had certified her as being cognitively impaired and “requiring substantial supervision to protect her from threats to her health and safety.” The court also allowed deduction of her physician costs.

However, the court disallowed the deduction for supplies because no one gave the court receipts or other substantiation that they were for medical care.

Medical expense deductions for long-term care services can save thousands in taxes. But as this case shows, you must be able to prove that you have met all the requirements. For example, have a clear plan of care in writing from a licensed heath care practitioner. Keep receipts for supplies and be able to show that they relate to the taxpayer’s care.

Finally, make sure you file a tax return to claim your deduction. Lillian’s deduction may not have been questioned in the first place if it had been claimed on a properly filed return.