Pros and Cons of Irrevocable Trust Vs. a Life Estate

Estate law can be a complicated landscape to navigate. Whether you are preparing your estate or helping a parent with estate planning, the process is complex. There are many different options you can use to protect your assets. Therefore, estate planning can get overwhelming quickly for someone who does not have prior estate planning experience. 

One of the most important aspects of estate planning is determining what happens to one’s assets. Estate planning can be a useful tool in making sure assets are transferred or made available to the right person at the right time. 

There are two ways to make sure your wishes are followed: an irrevocable trust and a life estate. However, not all estate plans are created equal. Depending on your financial situation, either one of the two options can be a better choice in your unique scenario.  Before making a decision, it is wise to speak with an experienced Long Island estate planning lawyer. Having a skilled lawyer may help you determine which option may be best for you or your family’s future.

What is an Irrevocable Trust?

An irrevocable trust is, like any other trust, a vehicle under which a grantor can place their assets into. As the name suggests, an irrevocable trust is one where the grantor would not be able to modify or end the trust’s terms once it is created. It is important to be specific regarding the language used in creating a trust as it can make or break how useful it is as an estate planning tool. 

Irrevocable trusts can be used in a lot of different ways. Many people use them as a means to avoid paying exorbitant estate taxes or to pay for long-term care while safeguarding their assets. Irrevocable trusts can also be used to protect your assets if you are facing lawsuits from creditors. There is a common misconception that, by putting your assets into an irrevocable trust, you will be forfeiting the ownership of your asset. With a well-executed trust, you can retain ownership of your property while protecting your estate. 

Unlike wills, a trust can also be used to appoint a trustor who can manage the trust’s affairs and distribute assets according to the predetermined terms of the trust.

Creating an irrevocable trust is best left in the hands of an experienced Long Island trusts attorney. A skilled estate planning attorney in Suffolk County or Nassau County on Long Island can make sure that the trust would fit your particular needs and serve your best interests.

What is a Life Estate?

A life estate is a property, usually a home, that a person owns and is allowed to use for the duration of their life. The owner, called the life tenant, can share the ownership of the property with another person, called the remainderman. The remainderman automatically receives the title to the property when the life tenant passes away.

Life estates are commonly used in the US by people seeking to make sure that their loved ones inherit their property. By creating a life estate, the ownership of the property can pass on to the beneficiaries without the need for a lengthy probate process.

However, by creating the life estate, the owner cannot sell or mortgage the property without the permission of the remainderman. As the remainderman is already locked in to receive the deed of the property, ownership of the property would revert back to the remainderman once the life tenant dies. 

Irrevocable Trusts vs. Life Estate: Benefits

A life estate can be used to gift a property to another person (beneficiary) by splitting the property’s ownership between the receiver and the giver.  The gifter will remain the owner of the property, however, the beneficiary will also have some sort of “ownership” of the property. This allows givers to transfer property easily to beneficiaries and also stay eligible for Medicaid or other low-income programs.

An example of how a life estate function is when a parent creates a life estate in order to meet the required asset limit for Medicaid. The parent will still have a stake in their property, but since the ownership of the property is shared, Medicaid will not see the property as solely owned by the parent.

An irrevocable trust, on the other hand, allows you to put your assets and properties in a trust instead of gifting them to someone else. By transferring assets into the trust, the grantor effectively removes any liabilities they get from the assets. However, in some cases, putting assets into the trust also means giving up control over any profits or income from the assets.

An irrevocable trust can be used to transfer substantial assets, allowing you to qualify for programs like Medicaid and other low-income benefits. For those who have large estates, an irrevocable trust can help lessen estate taxes that may be incurred when the grantor passes away. Instead of spending down their assets, Medicaid applicants can also use an irrevocable trust to protect their assets provided that they do so outside of Medicaid’s Look-back period. New York has a 60-month look-back period for applicants for institutional Medicaid.

A life estate and an irrevocable trust do not have to be exclusive. It is possible to put one property in an irrevocable trust while the others are on a life estate. In such a situation, it is still possible for you to have full control of your property. The two options both allow beneficiaries to avoid probate and each option has its own tax benefits as well.

If you are unsure which option would benefit you the most, it is important to speak to an experienced estate planning lawyer. A skilled lawyer may be able to help you explore all the options available to you. 

Irrevocable Trusts vs. Life Estate: Drawbacks

In terms of taxes and liabilities, a life estate will not minimize the amount of estate taxes your estate will have to pay to be able to pass your assets to your beneficiaries. If you have significant debt, a life estate will also be unable to prevent creditors from filing a lien on your home. Even though your property is free from any threats of foreclosure while you are alive due to the life estate, creditors can file a claim on your property when you pass away. Creditor protection does not apply to remaindermen in a life estate.

Aside from estate taxes, children in a life estate deed are also at a disadvantage due to the capital gains tax. Under New York law, couples are allowed a capital gains tax exclusion of up to $500,000 on their primary residence. This means that if the parents have lived in their home for at least two years during a five-year period before they sold the house, the sale’s proceeds will not be taxed for the couple. However, their beneficiaries may incur capital gains tax after they receive their part of the proceeds. This is because only their parents have tax exemptions. 

Another drawback of a life estate is that, as mentioned previously, owners or life tenants cannot sell their property without the permission of the remaindermen. This situation can be a cause for distress for parents who have included their children as co-owners. A consensus must be achieved by all parties before the property can be sold.

An irrevocable trust can be a very flexible tool for estate planning. Unlike a life estate, creditors cannot file a lien on property held in an irrevocable trust. They can only do so once the beneficiaries have inherited the property. The trust’s terms can also be customized to fit the needs of both the grantor and the beneficiaries. However, depending on the kind of trust, income taxes might need to be filed to make sure everything is in compliance with the law. 

When creating an irrevocable trust, you will need to account for a lot of contingencies in advance. As an example, it may be necessary to put into writing what should be done with the trust once the initial beneficiaries pass away. It is also important to make sure that the trustee is someone that would have no conflict of interest over the trust and that they understand the responsibility of managing the trust.

Irrevocable Trusts vs. Life Estate: Which should you pick?

The best kind of estate planning tool is one that would fit your specific financial situation. When planning your estate, it is important to carefully consider your goals or what you want to achieve with your estate. This is especially crucial when deciding between using an irrevocable trust or a life estate.

Evaluating your estate and keeping up with estate laws in New York can be an intimidating matter to handle. It can be helpful to consult with a skilled Long Island estate planning attorney who can assist you in ensuring that any documents or decisions you make will be legally binding. A qualified attorney can also prevent mistakes and alert you of any contingencies you might have missed during the planning process.

At Schlessel Law, PLLC experienced Long Island estate planning attorney Seth Schlessel has helped families achieve their goals with their estates. Schlessel Law, PLLC, provides services that may be able to protect your assets and ensure that your beneficiaries are taken care of. 

Contact Schlessel Law, PLLC today at (516) 574-9630 to schedule a consultation with Long Island estate planning attorney Seth Schlessel.

source https://www.schlessellaw.com/pros-and-cons-of-irrevocable-trust-vs-a-life-estate/