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, many will not be able to fund this on their own. In this case, they may look to Medicaid for help. If you are not sure if setting up an irrevocable trust in New Jersey is right for you, contact the Matus Law Group today.
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.
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.