You have decided that an irrevocable trust is an appropriate choice for you for estate and long term care planning. You have an idea of how much of your estate you want to transfer to you trust, but are not sure what assets are the right ones.
Although everyone’s circumstances and goals are unique, for most people certain kinds of assets are better choices to transfer to an irrevocable trust than others, and there are some that absolutely should not be transferred. The following is meant as a general over view and evaluation of types of assets, and their suitability for transfer to trust.
REAL PROPERTY : Your residence and other real property are among the most appropriate assets to consider placing in your trust. For one thing, as lifetime trust beneficiaries, you can continue to have the use and occupancy of your residence and other property. Furthermore, provisions can be included in your trust that will allow you to continue to receive you STAR and other exemptions on you residence real property taxes, and favorable income tax treatment if it is sold. If you want to downsize to a smaller residence, the trust can sell your present home and purchase a new one. For most people, unless they believe they will have to sell their home or other real property and “live off” the proceeds, real property, including the residence, are probably the best assets to place in your irrevocable trust.
LIFE INSURANCE POLICIES : Some people have rather larger insurance policies with significant cash value. They intend to keep those policies in effect for the death benefit. When applying for medicaid for nursing home coverage, the state will count the value of those policies against that you can keep. Sometimes the value of the policies exceeds the Medicaid amount, or uses up a large portion so that very little other assets can be retained. If the policies are transferred to the trust, then after the five year look back their cash value will no longer be counted by Medicaid. Like the residence and other real property, life insurance policies with cash value that you intend to keep for the death are among the best assets to transfer to your trust.
ASSETS THAT HAVE APPRECIATED IN VALUE : (e.g., Stocks, Bonds and Mutual Funds) If you have accumulated savings and investments and you want to protect some of those assets, transferring to your trust makes sense. When considering what investments to use, those appreciated value are usually best, because they are the last you would want to liquidate if you needed cash. For one thing, the last assets you would want to take cash from those that would results in taxable capital gains. For example, if you wanted to take $20,000 from your investments to purchase a car, why would you appreciated shares in mutual fun and pay capital gains tax instead of taking the money from a savings or money market account. Also, if the appreciated assets remain in the trust for the rest of your lifetime, upon your death the trust beneficiaries will receive a step up in basis. That means that any gain that accumulated during your lifetime will not result in capital gains tax if your beneficiaries sell the appreciated assets.
Rating: VERY GOOD
CASH : Cash is “safe” to transfer to an irrevocable trust, because there are no negative tax consequences as there are with other assets as discussed below. Cash in the trust might also be used to purchase a single premium life insurance policy that could provide a significantly increased amount that will pass to your beneficiaries.
Rating: GOOD TO VERY GOOD
SAVINGS BONS : Savings bonds can be suitable for transfer to an irrevocable trust, but there are frequently good reason not to do so. Often the bonds have a significant amount of accumulated income that will be taxed “some day to somebody.” Since most people who create and fun an irrevocable trust retain assets in their own names, those assets remain “exposed” to long term care costs. If the savings bonds are among the assets retained, they can be used to pay the nursing home. Although the income earned on the bonds will have to reported on your tax return, the nursing home bill can be included as an itemized deduction. Since nursing home cost typically run between $85,000.00 and $105,000.00 per year, that deduction can be significant and can be substantially reduce or eliminate the tax on bond interest. In other words, what would otherwise have to be paid to the government in taxes is paid toward the cost of the nursing home, which means in a sense, the government subsidized the cost. For the reason, when considering assets for your trust we will often recommend against including saving bonds.
Rating: FAIR TO GOOD
NON-QUALIFIED ANNUITIES : Including non-qualifies annuities in your trust can be complicated, particularly if you wish to retain the right to receive income from assets in the trust. For example, if you annuity is worth $100,000.00 and your initial investment was $20,000.00, then there is $80,000.00 of accumulated income. If you are the income beneficiary of the trust and the trustee liquidates the annuity or it matures, Medicaid will count the $80,000.00. If the trust is drafted so the annuity income is not payable to you, nevertheless if it will be reported to you for income tax purposes, and that could be problematic because you will not have the proceeds of the annuity to use to pay the tax. For these, reason, unless there are no other appropriate assets (i.e. most of your estate is in non-qualified annuities), we do not recommend these assets for your trust.
QUALIFIED RETIREMENT PLANS : These plans include IRAS, 401(k), 402(b) and similar government recognized tax deferred plans. Unlike non-qualified annuities where it is possible to draft your trust so that transfer will not cause accumulated income to be taxed at that time, transfer of a qualified plan will result in immediate taxation of the entire amount. In short, if you put your $100,000.00 IRA into trust, you will include $100,000.00 as ordinary taxable income on your income tax return. So, like savings bonds, there may be a “silver lining” to using these accounts to pay the cost of deductible nursing home expenses. But these plans cannot under any circumstances be transferred to your irrevocable trust because the transfer amounts to a liquidation of the account making it all taxable as ordinary income.
Keep in mind that these ratings are comparisons, and not absolutes, except for qualifies retirement plans which should not be used to fund your trust. They may apply differently in your particular circumstances. You should not rely on this list in deciding what to use to fund your trust without seeking the advice of competent counsel.