Need an Irrevocable Trust in New Jersey?

An irrevocable trust is a type of trust where the grantor transfers ownership of an asset from themself to the trust.  It is called an irrevocable trust because the trust is nearly impossible for the grantor to revoke.  Short of a court order or consent from all parties involved, no changes can be made whatsoever, and even if one of those conditions is met, the allowable changes may be limited.

An irrevocable trust is designed to be just that, irrevocable.  The laws surrounding these types of trusts make the trusts difficult to alter, but those same laws also help to keep the assets secure.  Due to the level of security an irrevocable trust provides its assets with, and the favorable tax treatment the assets receive, creating an irrevocable trust may be a wise decision.

Despite the significantly heightened separation between grantor and asset that exists within irrevocable trusts, irrevocable trusts serve a very important function for some people. For example, an irrevocable trust offers a unique protection that can shield assets from being counted against a Medicaid qualification.  For those who believe they may need Medicaid assistance for nursing home care may want to consider creating an irrevocable trust as these trusts are one of the safest and most reliable ways to shield your assets from counting against your Medicaid eligibility. 

Benefits of an Irrevocable Trust

The main benefit of an irrevocable trust is that the trust can shield your assets from being counted against you if you were to ever apply for Medicaid.  There are strict limits on the value of assets you can own when applying for Medicaid Nursing Home Care.  For example, a single individual who is applying for Medicaid Nursing Home Care cannot have an income exceeding $2,742 per month, they must have assets totaling under $2,000, and they must require the level of care that would be provided in a nursing home.  

Those limitations are very strict and in order to qualify for Medicaid, one must satisfy Medicaid’s five-year “Look-Back Period.”  The best way to handle additional assets that exceed the limitations set by Medicaid is to put those assets into an irrevocable trust.  

A person (the grantor) can take assets that would normally be countable against Medicaid eligibility and put them into an irrevocable trust, thereby transferring ownership of those assets from themself to the trust.  By doing this, the grantor can both control where the assets end up while also shielding them from being held against Medicaid eligibility.  Some assets that are countable under Medicaid that could be placed in an irrevocable trust are: cash, stocks, investments, secondary real estate properties, and bank accounts.   Medicaid Nursing Home Care can be a vital necessity for some, therefore it is important to consider whether an irrevocable trust could be a viable option for you.  We recommend contacting an estate planning attorney if you are unsure whether creating an irrevocable trust may be best for you.

Medicaid Asset Protection Trusts

Medicaid Asset Protection Trusts (MAPTs) are some of the most common types of irrevocable trusts because they can protect the grantor’s hard-earned assets while also helping the grantor become eligible for Medicaid assistance.  It’s common to transfer assets to children or to fail to create an estate plan altogether, and those missteps can cause one to be ineligible for Medicaid benefits. The Medicaid look-back system is designed to ensure that the applying individual has not recently shuffled their assets off to a family member.  In order to successfully protect the assets and qualify for Medicaid, a proper plan should be in place.

A Medicaid Asset Protection Trust operates as most other irrevocable trusts would.  The grantor will transfer assets into the trust, which will then be managed by a trustee.  These assets will no longer be owned by the grantor, but rather owned by the trust.  The assets will be distributed to the designated beneficiaries in accordance with the terms set upon execution of the trust.  The grantor, nor the grantor’s spouse, may be the beneficiary but nevertheless a MAPT allows the grantor to dictate which other people may inherit their assets.  

IRAs and 401(k)s cannot be transferred to a trust.  This confronts the grantor with two options: 1) liquidate the assets and put the cash into a MAPT; or 2) set the IRA or 401(k) to payout status.  A 401(k) or IRA in payout status is not a countable asset for Medicaid eligibility.  If you are unsure how your retirement accounts would interact with an irrevocable trust, our team at Rosenblum Law can help you find the answers.

Potential Obstacles of an Irrevocable Trust 

The biggest obstacle presented by irrevocable trusts is the ability of the grantor to access the assets in the trust or to amend the terms.  Once created, it can be very difficult for the grantor to change the material purpose of the trust.  While New Jersey law creates avenues for amending an irrevocable trust, it should not be assumed, with certainty, that an amendment can be made. 

Another possible obstacle is one’s inability to name themself or their spouse as a beneficiary.  This prohibition effectively bars the grantor and their spouse from ever owning that particular asset again.  That could be problematic if the trust is not planned properly or the grantor is left with an urgent need for the asset.  

These obstacles can be minimized through strategic planning and caution.  Setting the terms with care and having a retirement plan that is funded to payout enough money to help the grantor and their spouse survive are important measures to take.

Changing, Amending, or Terminating an Irrevocable Trust

Whether an irrevocable trust can be amended depends on several factors.  Those factors include the method through which the change is sought, the terms of the trust, and the desired change itself.  In New Jersey, there is a statute that permits certain modifications of irrevocable trusts.  The statute allows for some modifications in instances where all relevant parties consent, and where the changes sought do not affect the material purpose of the trust.

Despite the statute, you should not execute an irrevocable trust under the assumption that you will be able to amend it in the future.  The ultimate decision will be left up to the court or all of the parties involved in the trust, thus making the amending process very unpredictable.

To that point, an irrevocable trust should always be created with thorough planning.  We recommend consulting with an attorney to ensure that this plan is executed with the utmost diligence. This way you can be confident that you made the right decision upon execution of the trust.  

Tax Treatment of Irrevocable Trusts

Since the irrevocable trust owns its assets, the trust pays its own taxes.  Any capital gains taxes or other taxes that would normally have been paid by the grantor, will now be paid by the trust.  

Irrevocable trusts are also not subject to inheritance tax.  When the assets in the trust are released to the beneficiaries, the assets from the irrevocable trust are generally not included with the rest of the grantor’s taxable estate.  

Still, federal and state tax issues can often be complex.  For more details regarding the tax consequences of creating an irrevocable trust, we recommend contacting a qualified tax attorney. 

How Can Rosenblum Law Help?

If you believe that you or a loved one may apply for Medicaid benefits for the purpose of receiving nursing home care, then creating an irrevocable trust may be wise. A Medicaid Asset Protection Trust can help to protect your hard-earned assets from being used to pay for medical expenses or from precluding you from receiving Medicaid benefits.  By creating a MAPT or other form of irrevocable trust, you can rest assured that your assets will be distributed to the beneficiaries you wish.  

Due to the permanence of irrevocable trusts, creating one should be done carefully.  As the grantor, you want to be confident in your decisions.  At Rosenblum Law, we have a team of experienced, dedicated attorneys who can help guide you through every step of this process.  We will work with you to ensure your assets are handled in a way that yields the best outcome, while also helping you or a loved one receive the Medicaid benefits they need. Contact us at 888-235-9021 for an initial consultation to get your planning underway.