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How an Irrevocable Trust in New Jersey Can Be Part of Your Long-Term Care Plans

Last updated on: May 27, 2024

Most people will require some form of long-term care as they age. Long-term care can be extremely expensive, and nursing home care is not covered by Medicare. Although some people have the financial means to pay for their long-term care or have made arrangements well in advance, some individuals may not be able to fund this on their own. In this case, they may look to Medicaid for help.

If you are unsure if setting up an irrevocable trust in New Jersey is right for you, contact The Matus Law Group today. Our skilled New Jersey trust attorney can help you navigate the complexities of long-term care planning and guide you on whether an irrevocable trust is a suitable option for your situation, especially regarding Medicaid protection. Planning ahead is crucial to having the necessary resources in place to cover potential long-term care expenses. Contact us at (732) 785-4453 to schedule an appointment and take the first step toward securing your future and protecting your assets.

What is an Irrevocable Trust in New Jersey?

A trust is a legal vehicle that allows assets to be held by the trust, not the individual, and managed by a trustee who will direct those assets to the beneficiaries of the trust. There are two main types of trusts: revocable trusts and irrevocable trusts.

In many cases, people choose revocable trusts that can be modified over time for their flexibility. But there are cases when an irrevocable trust is extremely useful. It can offer incredible tax benefits, be beneficial if you have a disabled dependent, and can also be helpful when it comes to long-term care to overcome asset eligibility requirements set by Medicaid.

How Does the Irrevocable Trust Work?

When the trust is created, the creator will designate a trustee to manage it and also name beneficiaries of the trust. The person who creates the trust can be a beneficiary, but not a trustee.

Once the creator transfers assets into an irrevocable trust, he or she no longer controls those assets. The trust now owns the assets, and the trustee controls them. One of the benefits of this trust is that these assets are no longer part of the creator’s estate or a tax liability. The trust will pay its own taxes.

Different Kinds of Irrevocable Trusts in New Jersey

There are many irrevocable trusts that can be used to accomplish a variety of goals. The most popular in New Jersey are the following:

  • Bypass Trust – Married couples who have substantial estates can use this estate planning tool to reduce estate taxes on the death of their spouse. This arrangement allows the spouse who has predeceased the other spouse to transfer their property into the trust for his/her benefit. The income from trust property is available to the spouse who survives, but it doesn’t become part of the estate. It also does not attract estate taxes.
  • Special Needs Trust – This irrevocable trust is intended to provide for an adult or child with disabilities who are receiving Medicaid or other public benefits. A special needs trust is created to protect the eligibility of a beneficiary for benefits and ensure that they don’t lose their eligibility if there is a large inheritance.
  • Spendthrift Trust- A spendthrift trust protects a beneficiary who cannot manage their finances, is at high risk of creditors’ claims, or has a problem using alcohol, drugs, or gambling. The trust is managed by the trustee. Assets are transferred to the trust. The trust terms allow the trustee to provide funds on a regular basis to the beneficiary or pay monthly expenses directly.
  • Charitable Trust – This type of trust is for people who want to leave a charitable legacy while also minimizing estate taxes. A charitable remainder trust is a trust where the property is transferred to a charity as the final beneficiary. After that, income from the trust is distributed to another person for a specified time.
  • Life Insurance Trust – The proceeds from a life insurance policy often count towards the estate’s total value, which can have estate tax implications. An Irrevocable Life Insurance Trust is one that acquires the life insurance policy and names a trustee to distribute the proceeds upon the death of the grantor.
Type of Irrevocable Trust Purpose/Use
Bypass Trust Reduce estate taxes for married couples with substantial estates. Allows the transfer of property to benefit the surviving spouse without inclusion in the estate.
Special Needs Trust Protects the eligibility of individuals with disabilities for Medicaid and public benefits, ensuring they don’t lose eligibility due to a large inheritance.
Spendthrift Trust Provides financial protection for beneficiaries who struggle with managing finances, face creditor claims, or have addiction issues. Managed by a trustee.
Charitable Trust Allows individuals to leave a charitable legacy while minimizing estate taxes. Property is transferred to a charity as the final beneficiary, with income distributed to another person for a specified time.
Life Insurance Trust Manages life insurance policy proceeds to avoid estate tax implications. Acquires the policy and designates a trustee to distribute proceeds upon the grantor’s death.

Who Owns The Property In An Irrevocable Trust

Assets conveyed into the trust are transformed into trust property. Trust property comprises all the assets that the grantor, the trust’s creator, transferred into the trust while alive, as well as assets for which the trust assumes a beneficiary role following the grantor’s passing. This may encompass real estate and personal possessions, whether tangible or intangible, such as bank accounts or financial interests.

In irrevocable trusts, the property is exclusively owned by the trust itself. Legally, the property belongs to the trust and is registered in its name. The grantor, trustee, and beneficiaries lack any form of ownership rights concerning the trust property. From both a legal and financial perspective, the grantor has no connection to the assets, and the trustee—responsible for managing the trust assets for the beneficiaries—does not possess ownership of the trust property. While the trustee has control over the assets, their responsibility is to prioritize the well-being of the beneficiaries, following the instructions provided by the grantor during the trust’s establishment.

When it comes to understanding the intricacies of property ownership within an irrevocable trust, legal guidance becomes crucial. At The Matus Law Group, our seasoned New Jersey trust attorneys can provide invaluable insights into the legal framework surrounding irrevocable trusts, with the aim of protecting and managing your assets properly. Contact us to schedule a consultation and secure your assets with confidence.

How Does a Revocable Trust Help With Medicaid Asset Eligibility Requirements?

In order to receive Medicaid benefits, an applicant must fit into Medicaid’s narrow eligibility requirements for assets and income. Many have too many assets to qualify for Medicaid. In that case, individuals may choose to “spend down” income and assets to qualify. Fortunately, assets placed in an irrevocable trust are no longer “countable” by Medicaid.

Medicaid will review your assets when determining eligibility. Many assets will be counted against their 2021 cap of $2,000, and others will not. When you place assets in an irrevocable trust, they are considered “non-countable” assets since the trust now owns them, and you don’t. Other non-countable assets include:

● Your primary residence and rental properties
● Personal property including furniture and jewelry
● Home improvements
● Life insurance
● 401K and IRA accounts
● Assets you have attempted to sell in good faith
● Pre-paid burial services

Why You Shouldn’t Gift These Assets to Your Children Instead?

It may seem like the obvious solution to transfer your assets to your children now. But if you are doing this for purposes of qualifying for Medicaid benefits, Medicaid has a five-year look-back period for anything that is considered a gift. The transfer of any assets to qualify for Medicaid must be completed at least five years prior to be protected.

In addition, there are advantages to naming your children beneficiaries of the trust instead of gifting them the assets now.

● In the case of a divorce or death, the spouse may have rights to those assets.
● Creditors cannot seize the assets in the trust.
● The trust will provide legal accountability for the family.

If you have more questions concerning irrevocable trusts and how they can ensure your long-term care, you should discuss this with a professional estate planning attorney. The estate planning professionals at The Matus Law Group would be happy to discuss any of your estate planning needs during a consultation.

For more than 20 years, The Matus Law Group has been advising residents of New Jersey in all matters of estate planning and special needs planning services for both children and adults. The Matus Law Group is an experienced team of attorneys who can help you and your family plan for life, protect and care for loved ones with special needs, cope effectively with disability and death, and preserve inheritances for future generations.

Dangers of Irrevocable Trusts

Irrevocable trusts, often used for asset protection and estate planning, come with significant risks that warrant careful consideration. The primary danger of an irrevocable trust is its inflexibility. Once you establish an irrevocable trust and transfer your assets into it, you cannot alter the terms or reclaim control over those assets. This irrevocability can lead to unforeseen complications, especially if your financial situation or intentions change.

Another critical risk involves the choice of trustee. Since you cannot serve as your own trustee in an irrevocable trust, you must appoint someone else to manage the trust. This transfer of control means you must rely on the trustee to manage the assets according to the trust’s terms, potentially leading to issues if the trustee fails to act in the best interest of the beneficiaries or manages the assets poorly.

Furthermore, setting up an irrevocable trust without a clear, confident understanding of your goals can lead to regret. If the purpose behind the trust is not well-considered or if circumstances change, you might find yourself stuck with a trust arrangement that no longer serves your needs or those of your beneficiaries.

While irrevocable trusts can offer significant benefits, including tax advantages and protection from creditors, they are not suitable for everyone. Their irreversible nature requires a thorough and confident strategy at the outset, along with a trustworthy and competent trustee to manage the trust effectively.

Top 5 FAQs about Irrevocable Trusts for Long Term Care

Since the Deficit Reduction Act of 2005, trusts have become an increasingly popular tool for asset protection in long-term care planning. This legislation increased the look-back period from three years to five years for gifts to individuals but maintained the five-year look-back period for gifts to trusts. Therefore, a gift to a trust has the same five-year look-back as a gift to an individual.

1.  Why use a trust for long-term care instead of gifting assets to a child?

There are many reasons a trust is preferable for asset protection in long-term care planning than an outright gift to a child. First, a child may suffer through a divorce and lose some of the gifted assets to a former spouse.

Second, a child may predecease the spouse with the child’s spouse or descendants ultimately owning the property. Third, if a child receives the assets, and later has problems with creditors, the child’s creditors may be able to seize the gifted assets. With a trust, many of these issues can be avoided. In addition, a trust can provide some legal accountability among the family members.

2. How does the Trust work?

The creator of the Trust names a Trustee to handle the investment of assets held by the trust and make distributions of trust assets as detailed in the trust document.

The trust will also name beneficiaries of the trust. These individuals are entitled to distribution of trust income and/or assets. If the trust is drafted properly, the trust assets may be protected from a beneficiary’s creditors.

The Trust may have different beneficiaries during the creator’s lifetime and at the creator’s death. In most cases, an individual should wait at least five years before filing a Medicaid application after transferring assets to an irrevocable trust.

3. What type of Trust will not count as an asset for Medicaid or the Veterans Administration?

The Trust must be irrevocable. If the creator of the trust can revoke or amend the trust, it is considered a countable asset of the creator of the trust. Furthermore, the creator of the trust generally should not be a beneficiary of the trust. If the creator of the trust can receive income or principal from the trust, Medicaid will count as a resource whatever the creator/beneficiary can obtain from the trust.

4. Who can be a Trustee?

In most cases, a child of the creator serves as trustee, but other individuals or corporations may serve as Trustee. It is important that the creator of the trust or his or her spouse never serve as Trustee.

If the trust creator has control over the assets of a trust, Medicaid will count the trust assets as countable resources of the trust creator. Control is tantamount to ownership.

5. What assets may fund a trust?

Almost any asset can be used to fund a trust for long-term care planning, including real estate, stocks, bonds, cash, even a personal residence. An important exception is retirement assets, such as an IRA or 401(k) which cannot be transferred to a trust, in most cases, without incurring income tax liability. Please note that certain assets, such as a personal residence, may require unique provisions in the trust document to maintain property tax advantages.

If you are concerned about protecting your assets in case of a need for long-term care, contact us now and we are happy to sit with you for a peace of mind session to review all of your options.

Christine Matus

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Christine Matus

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