One of the best strategies to plan for long-term care involves using an irrevocable trust. However, the word “irrevocable” makes people a little wary. It shouldn’t. Beck, Lenox & Stolzer Estate Planning and Elder Law promotes the use of the Intentionally Defective Grantor Trust, a type of irrevocable trust, as it can provide both protection and flexibility, according to the article “Despite the name, irrevocable trusts provide flexibility” from The News-Enterprise. Note: Beck, Lenox & Stolzer uses the term “One-Step Trust” to describe this particular trust.
Trusts are created by an estate planning attorney for each individual and their circumstances. Therefore, the provisions in one kind of trust may not be appropriate for another person, even when the situation appears to be the same on the surface. The flexibility provisions explored here are commonly used in Intentionally Defective Grantor Trusts, referred to as IDGTs.
Can the grantor change beneficiaries in an IDGT? The grantor, the person setting up the trust, can reserve a testamentary power of appointment, a special right allowing grantors to change after-death beneficiaries.
This power can also hold the trust assets in the grantors’ taxable estate, allowing for the stepped-up tax basis on appreciated property.
Depending on how the trust is created, the grantor may only have the right to change beneficiaries for a portion or all of the property. If the grantor wants to change beneficiaries, they must make that change in their will.
Can money or property from the trust be removed if needed later? IDGT trusts should always include both lifetime beneficiaries and after-death beneficiaries. After death, beneficiaries receive a share of assets upon the grantor’s death when the estate is distributed. Lifetime beneficiaries have the right to receive property during the grantor’s lifetime.
While grantors may retain the right to receive income from the trust, lifetime beneficiaries can receive the principal. This is particularly important if the trust includes a liquid account that needs to be gifted to the beneficiary to assist a parent.
The most important aspect? The lifetime beneficiary may receive the property and not the grantor. The beneficiary can then use the gifted property to help a parent.
An often-asked question of estate planning attorneys concerns what would happen if tax laws changed in the future. It’s a reasonable question.
If an irrevocable trust needs a technical change, the trust must go before a court to determine if the change can be made. However, most estate planning attorneys include a trust protector clause within the trust to maintain privacy and expediency.
A trust protector is a third party who is neither related nor subordinate to the grantor, serves as a fiduciary, and can sign off on necessary changes. Trust protectors serve as “fixers” and are used to ensure that the trust can operate as the grantors intended. They are not frequently used, but they offer flexibility for legislative changes.
Irrevocable trusts are an excellent way to protect assets when drafted with both protection and flexibility in mind. If you are considering planning for long-term care and would like more information on how this trust may address those concerns, schedule a free phone conversation with a Beck, Lenox & Stolzer attorney here.
Reference: The News-Enterprise (March 18, 2023) “Despite the name, irrevocable trusts provide flexibility”
