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How Can an Irrevocable “Gifting” Trust Benefit You and Your Loved Ones?
Through careful estate planning, you can ensure that you leave a lasting legacy that can improve the lives of the people you love after you are gone. However, by utilizing certain estate planning tools, such as irrevocable “gifting” trusts (IGTs), you can also share your hard-earned assets with beneficiaries during your lifetime. While setting up a trust is a more involved process than directly giving money to family and friends, the benefits may outweigh the extra effort and expense.
With an IGT, you may be able to avoid the costly gift tax and protect the gifted funds from misuse or depletion by creditors. If appropriately managed, IGTs have the added advantages of potentially reducing your overall tax burden and helping you restructure your finances to meet the asset limits to qualify for Medicaid. A knowledgeable New York trusts lawyer from Davidov Law Group can evaluate your unique situation and help you explore whether an IGT can help you maximize your gifts to your heirs.
What Are the Tax Advantages of an IGT?
An IGT is a type of irrevocable trust. When the grantor funds the IGT by transferring ownership of assets to the trust, they relinquish control of those assets, which are no longer considered part of their taxable estate. This feature of irrevocable trusts allows them to offer tax planning benefits. For example, if you have a high-value estate, you may be in danger of going over New York’s “tax cliff.” If your estate’s value exceeds New York’s tax exemption by more than five percent, you could face a significant tax burden as your entire estate will be subject to a tax rate of up to 16%. By transferring assets into an IGT or other type of irrevocable trust, you can reduce the value of your estate and avoid or mitigate the high costs of surpassing the tax cliff.
Gifting money directly to your heirs without setting up a trust is the most straightforward method of transferring money, but it can lead to hefty taxes if you wish to make a large distribution. The IRS’s annual exclusion for gifts in 2023 is $17,000 per donee. This exclusion may be used to your advantage by properly structuring your IGT. You may transfer your desired amount of assets to the IGT, then grant each of the trust’s beneficiaries the temporary power to withdraw the maximum gift exclusion amount each year.
With careful planning, you may reduce or even eliminate the gift tax you must pay on transferring these funds, optimizing your estate’s value to your heirs.
How Can a Gifting Trust Protect Your Beneficiaries?
Trusts are often used as a structured and safe way to pass money to people who may have difficulties managing assets on their own. If you have concerns about the capabilities of your beneficiaries to handle a large influx of cash due to their age or life situation, controlling asset distribution through an IGT may be a good choice. Because the trust owns the assets, they are protected from the beneficiaries’ creditors, court judgments, and divorce proceedings.
Your legal team can also help you structure the terms of your IGT to meet your needs. You can provide specific instructions to the trustee who is in charge of distributing the trust’s assets. These instructions may restrict what the funds can be used for or place age limits on the distribution so you can ensure the maturity of the individual before they receive funds. An experienced estate planning lawyer can help you determine what protections may be necessary to ensure the financial stability of your beneficiaries now and in the future.
What Role Can an IGT Play in Medicaid Planning?
With the costs of long-term care for older Americans rising rapidly, it is wise to begin planning for these expenses early. Without a detailed strategy in place, the price of getting quality medical care and living in a nursing home could unnecessarily and unexpectedly deplete your estate and cause financial distress for your loved ones.
Medicaid is a means-tested government benefits program that may help individuals pay for the care they require in their golden years. However, the program has very low asset and income limits.
Medicaid prevents potential applicants from giving away their assets to qualify by enforcing a “lookback” period of several years and imposing penalties and waiting periods on individuals who improperly transferred assets. Your lawyer can help you decide whether an IGT may be a better method of gifting assets to reduce the value of your estate to qualify for Medicaid without incurring these costly penalties. However, early action is crucial if you wish to build the most robust plan possible.
Can You Retain Indirect Access to The Trust’s Assets?
Irrevocable trusts have many advantages, but it is important to remember that you can no longer directly make changes to the trust or maintain control of the assets it contains. However, you can designate a trusted individual to be the trustee of the IGT. The trustee manages the trust’s assets and their distribution.
You may be able to retain some indirect influence over the IGT through your trustee and the instructions you’ve put in place for the trust. You could also make your spouse a beneficiary of the trust, so they could receive distributions of funds that could then be used for any purposes you decide as a couple.
How Can an Experienced New York Trusts Lawyer Assist You?
Irrevocable “gifting” trusts are powerful and beneficial estate planning tools, but they can be complex to create and maintain. A skilled trusts lawyer from Davidov Law Group can help you draft a custom-built IGT that meets your estate planning needs and safeguards your gifts to your beneficiaries during your lifetime and beyond. Contact our law firm today at 516-253-1366 to schedule a free, in-depth case evaluation.
