A Personal Asset Trust℠ Offers Flexible Options to Protect Your Children’s Inheritance

When people engage in estate planning, they often want to protect their legacy and the gift they leave their loved ones. They may want to ensure those assets are protected for the use of their children and grandchildren. While basic estate planning with a will or a typical trust may make your wishes known, it doesn’t offer much asset protection, if any. Specially designed trusts provide better protection. Find out more about a specific trust tool, the Personal Asset Trust℠, below, including how it can help you protect your kids’ inheritance.

Traditional estate planning techniques leave an inheritance “to” a child or a grandchild. If some kind of protection was needed because the child was a spendthrift or was receiving needs-based government benefits, someone other than the child can be placed in charge of the inheritance as the trustee. Modern techniques, like the Personal Asset TrustSM, leave assets “for” the child or grandchild. With a Personal Asset TrustSM, it is possible to allow the child to be the trustee, and only when there is a problem will a co-trustee be added or used to replace the child as trustee. Once the problem is resolved, the child may be reinstated as the sole trustee.

What Is a Personal Asset Trust?℠

A Personal Asset Trust℠ is a unique type of trust that is built into and springs out of your own living trust. This allows ownership of the inherited assets to remain in the trust, to be controlled by the beneficiaries for their own use and enjoyment. The Personal Asset Trust℠ gives an heir more protection than if they received the inherited assets outright. Typically, a Personal Asset Trust℠ owns non-retirement assets.

To understand this concept, it’s best to compare the method of inheritance via a Personal Asset Trust℠ versus inheritance through a traditional trust:

• When you create a traditional trust, you place assets in the ownership of the trust. You also create provisions for how those assets will pass to your heirs upon your death. Generally, the assets that are to be inherited are distributed outright “to” your heirs upon your death. Some families use a stepped distribution where ownership is transferred when the beneficiary reaches certain specific age milestones — for example, typical ages for a stepped distribution might be something like one-third at 25, the second third at 30 and the final third at 35. But once the assets are distributed out of the trust, and the child owns the assets, any problem the child has can take the assets away from the child. For example, if the child was sued, the entire inheritance could be seized and taken from the child.
• With a Personal Asset Trust℠, ownership of the assets doesn’t move from the trust to the individual. Instead, ownership moves from the trust to a separate trust that is only for the benefit of that child. Your child can be the trustee and manage the assets. Additionally, the child will be the beneficiary and can use the trust assets as they need. The child can take money out of the trust to spend on consumables – pay bills, take a vacation, etc. But if they want to invest the assets (buy a house, invest in stocks & bonds, or to start a business) the child has the trust make the investment and own the investment for them. The key is that the trust continues to own the inheritance and because of that the inheritance will be protected from problems like a divorce, a lawsuit, a bankruptcy, tax liens or other creditor claims.

How Does a Personal Asset Trust℠ Add Protection for Heirs?

By leaving an inheritance in a trust for the benefit of your child you can give all the benefits of the inheritance without the risks of outright ownership. In fact, all fifty states recognize the concept of a third party settled asset protection trust. In this case you are the third party establishing the trust for the benefit of your child. Any existing or future creditors of your child will not be able to access the trust’s assets as long as your child honors the trust as a separate entity. If your child is going to be the sole trustee over the inheritance, it is also important for your child to use features like a trust protector that are built into the Personal Asset Trust℠. This method provides extended protection for your heirs because they never own the assets. The ownership remains with a trust. That means your heirs can benefit from the assets, but they don’t have the risks of ownership.

One example of a risk of ownership is a lawsuit. Imagine the following scenario:

• You have one adult child and they have two children.
• You leave assets to the adult child with hopes that there will be some left for the grandchildren.
• Your adult child is involved in an auto accident that was their fault, and they are sued.
• If your adult child owns the assets you left for them, those assets are at risk in the lawsuit.
• It’s possible that your adult child could lose all of the assets you left; there would be nothing for them and nothing left for your grandchildren.

However, if you had opted for estate planning that included a Personal Asset Trust℠, the assets you left are owned by the trust, not your child. The inherited assets can be protected from the lawsuit, so that the inheritance won’t be taken from your grandchildren.

When you create a Personal Asset Trust℠ for your child, you create a barrier for their assets against:

• Creditors. Creditors can’t sue them for the assets or attempt to take the assets, because your child does not own the assets in the trust.
• Lawsuits. As mentioned above, anyone suing your child can’t try to take assets that your child does not actually own.
• Spouses and ex-spouses. Because your child doesn’t own the assets, they aren’t considered marital property and can’t be targeted in property divisions as part of a divorce.
• Estate Taxes. If your child does own assets at death the government cannot assess an estate tax against the assets. That way an inheritance may pass from generation to generation without transfer taxes, potentially preserving hundreds of thousands of dollars for your family’s needs.

Can You Add a Personal Asset Trust℠ to an Existing Trust?

Yes, you can add this option to an existing revocable trust via an amendment. If you’ve already invested time and money into creating a living trust, amending it in this way can be a cost-effective way to provide future asset protection for your heirs.

What If You Have Large Qualified Retirement Accounts like IRAs or 401(k)s? Can they be protected by a Personal Asset Trust℠?

First, you should never try to change the ownership of a retirement account into any kind of trust. The tax code treats a change of ownership of a retirement account as a complete withdrawal of all of the retirement funds, which makes the full balance of the retirement account taxable income. So, can you name a Personal Asset Trust℠ as the beneficiary of a retirement account? Because the rules governing IRAs are so complicated, it is not recommended that Personal Asset Trust℠ be the beneficiary of retirement plans.

Instead, there is a specialized trust, designed to be the beneficiary of retirement plans and it gives the same kind of asset protection as a Personal Asset Trust℠. This type of trust, called an IRA Inheritance TrustTM is built to comply with all of the IRS’s regulations. In fact, the IRS has reviewed this type of trust in a Private Letter Ruling (PLR 200537044). An IRA Inheritance TrustTM gives asset protection to the heir and allows for the most tax deferral of the inherited IRA. Essentially, the IRA Inheritance TrustTM has a Personal Asset Trust℠ built right into it.

What if You Have an Irrevocable Trust?

While you might have heard that an irrevocable trust cannot be modified, that’s not true. There are a number of methods available to modify irrevocable trusts. In some states, you can often do so with the consent of the donor and all heirs. Of course, obtaining court approval is possible. It is often easier and less expensive to use a Trust Protector if the trust provides for one. Finally, decanting in irrevocable trust may be possible. Decanting an irrevocable trust involves moving assets from one irrevocable trust to another irrevocable trust. Both trusts must have the same beneficiaries, but the second trust can have different terms and conditions than the first.

If you already have an irrevocable trust and you are interested in learning how you can make changes to provide more asset protection for your heirs, reach out to the Law Office of Boyd & Boyd, P.C. to find out how we can help. We’re experienced in amending trusts, including irrevocable trusts, and can work with you to ensure your trusts and estate plans best serve your needs and support your goals for the future.

Generally speaking, an Irrevocable Trust may not be changed, but several narrow exceptions allow a deceased spouse’s Irrevocable Trust to be amended. To make any changes, the surviving spouse should have the advice and services of the right Cape Cod estate planning attorney.

Irrevocable Trusts have become increasingly popular in recent years as an estate planning tool. Irrevocable Trusts often reduce the tax burden on a Donor’s estate (a Donor is the person who creates the Irrevocable Trust) while transferring the Donor’s assets to his or her loved ones.

Additionally, assets in Irrevocable Trusts are protected from creditors and legal judgments because an Irrevocable Trust will not be a party to a lawsuit. In return for these benefits, the Donor gives up his or her right to amend the terms of an Irrevocable Trust.

However, after a spouse’s death, the law in Massachusetts (specifically Massachusetts General Law Chapter 203E § 411) does allow for revisions to a deceased spouse’s Irrevocable Trust, provided that specific criteria are met and that the appropriate legal procedures are followed.

What Are Irrevocable Trusts and How Do They Work?

A Revocable Trust becomes irrevocable upon the death of the person or persons who have the right to amend the trust.  If each spouse has a separate revocable trust, when one spouse dies, that spouse’s trust becomes irrevocable.  In many cases, the trust is designed to split into two or more irrevocable sub-trusts. This is usually done for a specific, limited purpose, such as estate tax reduction.  The Typical A-B Trust does just that.  In some states, like Massachusetts, it is necessary to create A-B-C trusts to shelter a portion of the estate from the state estate tax.  But after one spouse dies, it may become desirable to modify the irrevocable trust because of changes in the law, tax changes or changes in a family’s situation.

After the death of a Donor, a Successor Trustee is responsible for the administration of the Trust. In Massachusetts, a Successor Trustee may need the advice of a Cape Cod Trust attorney to ensure a smooth and straightforward administration of the Trust at every stage of the process.

Amending an Irrevocable Trust by Petitioning the Court

After a Donor’s death, if all of the beneficiaries agree, they may petition a Massachusetts court to amend an Irrevocable Trust. If their proposed revision does not conflict with the original aims of the Trust, the court will usually grant the beneficiaries’ request and allow the amendment.

A petition for court-approved modification of an Irrevocable Trust may be particularly helpful after a Donor has died and the beneficiaries need to modify the Trust because circumstances have changed.

What Is Decanting?

“Decanting” allows the Successor Trustee of an Irrevocable Trust to distribute – or to “decant” – assets from the original Irrevocable Trust into a second Trust with more favorable provisions.

The original Irrevocable Trust must contain a provision that gives the Trustee authority to decant the trust. Decanting doesn’t “amend” an Irrevocable Trust, but decanting instead creates a new Trust that in effect amends the original Irrevocable Trust.

There is no Massachusetts law that specifically authorizes decanting, but in the case of Kraft v. Morse (2013), a Massachusetts court held that when an Irrevocable Trust gives a Successor Trustee the authority to make discretionary distributions, decanting is included in that authority. Additionally, the Kraft case requires that going forward, a decanting provision must be included in the original trust document for a Trustee to decant an irrevocable trust in Massachusetts.

What Are Trust Protectors?

Some trust documents may include Trust Protector provisions. A Trust Protector may be an individual may be named within the document, or sometimes the trust may allow for naming the person to act as a trust protector in the future. The language in the Trust document spells out the precise authority that a Trust Protector has, but essentially, a Trust Protector’s role is to protect the inheritance that is passing through the trust.

Some Trusts grant a Trust Protector limited authority to amend the Trust. This authority may include the ability to amend the Trust in response to changes in tax law, to remove a Successor Trustee, or to take other actions to protect the Trust assets. If granted the authority, a Trust Protector may:

1. amend the language of the Irrevocable Trust document
2. remove a Successor Trustee or beneficiary
3. modify distributions based on the beneficiaries’ circumstances

Can a Trust Document Provide for Its Own Changes?

Trusts have developed over time, and today’s Irrevocable Trusts may include many provisions that were not usually included in older versions of these documents. These provisions may offer more flexibility in the distribution of assets and the management of the Trust. In fact, in many states, the law allows for an Irrevocable Trust to be amended by an agreement among the Donor (if available), all beneficiaries and the Trustee. For states where there is no such provision under state law, an Irrevocable Trust document may allow the trust to be amended if the Trustee and the beneficiaries all agree on the terms of the amendment. Amending by Agreement can save families thousands of dollars by avoiding the need for a court proceeding to amend the trust.

If your spouse has passed away, a Cape Cod estate planning attorney can review your deceased spouse’s Irrevocable Trust and scrutinize the document’s language to determine if it allows for amendments or changes.

If you need to amend a deceased spouse’s Irrevocable Trust, and if the change is legal, reasonable, and does not conflict with the general goals of the Irrevocable Trust, a Cape Cod Trust attorney can probably help you make any necessary changes.

Why Would You Change a Deceased Spouse’s Trust?

While an Irrevocable Trust may need to be changed, for example, in order to respond to changes in the tax laws, a Trust may also need modification for specific and personal reasons. Let’s say that a husband creates an Revocable Trust, for himself and names his wife and adult children as beneficiaries after his death, and names his wife’s brother as the Successor Trustee.

Upon the husband’s death, the Trust becomes Irrevocable. Typically the Irrevocable Trust would now become a new taxpayer. Most Irrevocable Trusts are taxed at very high rates – 37% on income over $13,451 as of 2022. If the surviving spouse wished to lower the taxes, a simple amendment can change the way the Irrevocable Trust is taxed. For example, the Irrevocable Trust could be amended so that the trust is essentially ignored for income tax purposes. This would result in the income being taxed at the same bracket as the beneficiary – and result in significant tax savings every year.

But remember, an Irrevocable Trust must include a provision for (1) amending by agreement, (2) amending through a Trust Protector, or (3) amending by decanting. Otherwise, any change of this nature requires unanimity among all of the beneficiaries. If even one beneficiary opposes an amendment to an Irrevocable Trust, a Massachusetts court will not approve or even consider the modification proposal.

Sometimes, there may be additional methods to amending a trust, so don’t rule out the option if you think it may be difficult to get one beneficiary’s approval. Instead you should consult with a Cape Cod estate planning attorney who can tell you your options.

When Should You Contact a Massachusetts Trust Attorney?

If you do not have a Trust, Will, or estate plan established, you probably should, especially if you have a family, own a business, or own property or assets. We cannot predict tomorrow, so you should consult an estate planning attorney now about protecting your estate and your loved ones.

When an Irrevocable Trust document does not precisely spell out how a Trust dispute is to be resolved, a beneficiary or Successor Trustee may need the advice and services of a Massachusetts Trust attorney to help manage and resolve the dispute.

Massachusetts Trust attorneys also offer Trustee and estate administration services aimed at helping a Successor Trustee effectively handle his or her many obligations.

If you need to make changes to a deceased spouse’s Irrevocable Trust, a Massachusetts Trust lawyer will work with you and will provide the insights and legal services you may need. To learn more – or to begin the process of amending an Irrevocable Trust – you should contact a Trust attorney now.

What is the right way to leave your individual retirement account (IRA), 401(k), 403(b) or other qualified plan? Many people choose the wrong way. Do not be one of them. Instead, with help from a Cape Cod estate planning attorney, name an IRA Inheritance Trust™ as your IRA’s beneficiary.

If you’ll keep reading, you will learn about the advantages that an IRA Inheritance Trust™ provides.

Neglecting to name the right beneficiary for your individual retirement account can be a quite costly mistake. When you don’t designate a beneficiary, your retirement plan goes directly to your personal (probate) estate at the time of your death, and this can create a sizable tax burden.

You shouldn’t transfer your individual retirement account into a trust while you are still alive, but you can designate an IRA Inheritance Trust™ as the beneficiary of your IRA to provide asset protection for the retirement plan and allow for the longest stretch-out allowed by law.

How Does an IRA Inheritance Trust™ Work?

Trusts are excellent estate planning tools for protecting and preserving personal wealth and passing that wealth to the next generation. Qualified retirement accounts (IRAs, 401(k)s, 403(b), and Roth IRAs) allow you to save for retirement while allowing your savings to grow income tax deferred (or income tax free in a Roth). If you don’t use all of the savings in your qualified retirement plan you may eventually transfer those assets to heirs as beneficiaries.

When you designate a trust as the beneficiary of a qualified retirement account, like an individual retirement account (IRA), the trust inherits that IRA at the time of your death. Then the IRA is maintained as a separate account (an inherited IRA) that is an asset of the trust. This can be done for any qualified retirement plan, like Roth IRAs, 401(k)s and 403(b)s.

The IRA Inheritance Trust™ has been reviewed and accepted by the IRS as complying with all its regulatory requirements, as a tool for protecting inherited qualified retirement account funds. An IRA Inheritance Trust™ protects your beneficiaries from divorces, creditors, lawsuits, and estate taxes at the death of the beneficiaries.

Additionally, an IRA Inheritance Trust™ “stretches out” the required minimum distributions (RMDs) over the maximum term allowed for each separate beneficiary (typically this is ten years, but may be longer).

How Does an IRA Inheritance Trust™ Help You Avoid Risks?

If your beneficiary directly inherits your retirement account, there are potential disadvantages and risks. Instead of leaving your IRA, 401(k), or 403(b) retirement account funds directly to your children, create an IRA Inheritance Trust™ and make that trust the beneficiary.

You will need the guidance and insights of a Massachusetts estate planning attorney who is familiar with inherited IRAs.

What are the risks when beneficiaries directly inherit retirement account funds? Retirement accounts are protected from your creditors, but when the funds transfer to an individual beneficiary, that protection ceases. A direct inheritance from an IRA has no protection from divorces, lawsuits, creditors, or bankruptcy experienced by the beneficiary.

In fact, those threats could erode most if not all of the wealth you’ve labored to earn and leave to your loved ones, but by preparing an IRA Inheritance Trust™ with help from a Massachusetts IRA Inheritance TrustTM attorney, your beneficiaries may access their funds without those risks.

What Other Advantages Does an IRA Inheritance Trust™ Provide?

Because an inherited qualified retirement account that names an IRA Inheritance Trust™ as beneficiary is not considered an asset belonging to your beneficiary, it is protected from divorces, lawsuits, creditors, or a bankruptcy of that beneficiary.

Additionally, by naming a trust that allows for the longest deferral allowed by law, your individual retirement account funds will continue to grow tax-deferred and to compound over time.

Someone who inherits an individual retirement account has a right to larger distributions and may even withdraw the entire balance of the IRA as soon as it is inherited. On the other hand, when an IRA Inheritance Trust™ is the beneficiary, it is designed to encourage, but not force, a beneficiary of the trust to defer distributions.

What Can You Include in Your IRA Inheritance Trust™?

You may include provisions for special needs beneficiaries (for example, for someone receiving needs based government benefits, like SSI or Medicaid). Your Successor Trustee will decide when and how funds in your individual retirement account will be distributed. This lets you protect your beneficiaries and maximize their “stretch-out” benefits.

How Will an Estate Planning Attorney Help?

Anyone with retirement accounts currently worth at or above $150,000 should learn more about an IRA Inheritance Trust™. Especially if you are concerned about what may happen to your wealth after you’re gone, schedule a consultation with a Cape Cod estate planning attorney to learn more about establishing an IRA Inheritance Trust™ – or to begin the process.

Once your IRA Inheritance Trust™ has been prepared, you should review it with your attorney at least every three years. You may also need to update your trust immediately if you divorce, remarry, have a child, sustain a long-term or permanent disability, or suffer a death in the family.

Here’s another reason why your trust needs to be regularly updated. The laws that govern trusts are frequently changed. There were changes in 2019 and more changes are imminent. Changes in the law can affect the provisions of your trust, so those changes cannot be ignored or overlooked.

Have You Prepared Your Estate Plan?

An IRA Inheritance Trust™ is only one part of a comprehensive estate plan. If you do not already have a comprehensive estate plan in place, now is the time to begin the estate planning process. It can’t be done in haste, and you will need an attorney’s guidance and advice.

If you have a family, own a business, own significant assets, or if others count on you, your estate plan assures that your finances and assets will be handled properly after your death.

Without the right estate plan, there is no way to guarantee that your instructions will be followed after your death or that your assets will be distributed according to your wishes. Your estate plan also leaves instructions for your loved ones if you become incapacitated while you are still alive.

When Should You Schedule a Consultation?

After reviewing your assets, properties, liabilities, and your current financial situation, a Cape Cod estate planning lawyer can recommend a specific, comprehensive estate plan that will protect your assets – and more importantly, protect your loved ones – for many years to come.

A good estate planning lawyer will ensure that your estate plan is easy to understand, that nothing has been overlooked, and that you have the time and information you need to consider and review your estate planning options and make informed estate planning decisions.

Whether you need to prepare an IRA Inheritance Trust™, begin the estate planning process, update your estate plan, or if you simply need to learn more, make the call – right away – and schedule a consultation with a Massachusetts estate planning lawyer.

Here in Massachusetts, smart estate planning requires the guidance of a Massachusetts estate  & trust administration attorney to help you create the documents you’ll need. Keep reading to learn the basics about Trusts, how they work, and why you likely should create a Trust as part of your estate plan. One common question is, “can an irrevocable trust be changed?”

If you have loved ones who rely on you, now is not too early to start planning your estate. Put simply, estate planning is about making wise choices and putting those choices in binding legal documents to ensure that your instructions are adhered to faithfully at the time of your death.

Wills and Trusts are key estate planning documents that perform many of the same functions, but if you have assets or real estate holdings (that are worth roughly $100,000 to $200,000), a well-drafted and adequately funded Trust ensures that your assets and properties will be handled and distributed according to your wishes.

Eventually, all Trusts become irrevocable. A Trust is irrevocable when the Donor (the person who creates the Trust) is no longer able to amend it. Some Trusts are set up as irrevocable from the start. Others start out as revocable (meaning the Donor may alter, amend, or even cancel the Trust), but become irrevocable at the death of the Donor.

 

Whichever path you choose for your Trust, it is imperative that your Trust be flexible – able to adapt to changes in the law, changes in family circumstances, or changes in the way the Trust should be managed.

What is Modification by Consent?

It is possible for an Irrevocable Trust to be amended – just not by the Donor. Over the past decade or so, multiple methods for amending Irrevocable Trusts have become popular. In Massachusetts, there is statutory authority for amending Irrevocable Trusts (Massachusetts General Law Chapter 203E § 411).

If the Donor and all the beneficiaries agree, they may petition the Probate Court for permission to amend an Irrevocable Trust. If the amendment will not frustrate the original purpose of the Trust, the Court will typically allow the amendment.

What is Amendment by Agreement?

Some Trust documents will permit amendment by other means. Irrevocable Trusts may be amended without Court approval, but only if the terms of the Trust agreement are governed by the laws of a state that allows such action or if the Trust agreement permits amendment by agreement within its own terms.

What is Amendment by a Trust Protector?

Alternatively, some Irrevocable Trusts use the role of a Trust Protector. A Trust Protector is usually an independent party, not related to the Donor or the trust beneficiaries, who is given special powers that a Trustee is not given.

Often, a Trust Protector will be permitted limited authority to amend an Irrevocable Trust. This authority might include the ability to change the Trust due to changes in tax law, or to remove a Trustee, or to take other actions that are intended to protect the Trust assets from negative outside influences.

What is “Decanting” an Irrevocable Trust?

Finally, an Irrevocable Trust may be amended by “decanting”. In Massachusetts, Trust decanting is permitted if the Trust instrument authorizes the Trustee to remove the assets from one Irrevocable Trust and place them in a new Irrevocable Trust with the same trust beneficiaries.

Some states have statutes that authorize Trust decanting, but Massachusetts does not. Instead, estate planning attorneys in Massachusetts rely on case law (the case, Kraft v. Morse, 466 Mass 92 (2013), involved the Kraft family – the owners of the New England Patriots).

Under the Kraft decision, Trustees who have authority under an Irrevocable Trust to make discretionary distributions may distribute the Trust assets to a new, Irrevocable Trust with the same beneficiaries and with terms and conditions that better fit the needs of the beneficiaries. While not exactly amending a Trust, decanting an Irrevocable Trust has the same effect.

How Does a Revocable Trust Work?

A good estate planning lawyer can help you decide if your estate plan should be based on a will, a Revocable Trust (also known as a Living Trust), or an Irrevocable Trust. With a Revocable or Living Trust, you can move assets into the Trust’s ownership while you retain control of those assets.

In order to understand how a Revocable Trust can help you and your family, you should understand what a Revocable Trust is. Essentially, a Revocable Trust is a contractual agreement among three parties: (1) a Donor – the person who creates the Trust and gives some property/asset to the Trust; (2) a Trustee – the person who will manage and control the assets of the Trust; and (3) a beneficiary – the person (or persons) who will get the use and enjoyment of the assets in the Trust.

Initially, most people set up their Trust and take on all three roles. But in order to have a valid Trust there must be at least one other person involved in the Trust. An easy way to add another person is to add a future interest beneficiary – someone to be the beneficiary after you pass away.

This is typically a spouse, if you are married, followed by the children (or whomever you wish to receive your wealth at the time of your death). This achieves your testamentary disposition needs.

What is the Role of a Successor Trustee?

Additionally, a Trust will provide for a Successor Trustee, someone to be the Trustee if you are no longer able to act in that capacity. If you are ill or unable to act as your own Trustee, your Successor Trustee may step in to manage the Trust assets on your behalf.

Eventually the Successor Trustee will manage the assets of the Trust after you pass away, making sure the inheritance is quickly and efficiently available for your heirs, the future interest beneficiaries.

You may modify or cancel a Revocable Trust as you wish, and the assets that are owned by your Revocable Trust at the time of your death will transfer to or for the beneficiaries without being subjected to the often costly and lengthy probate process.

For example, an IRA Inheritance Trust ™ is a Revocable Trust that becomes the beneficiary of your IRA (individual retirement account) after your death. It provides your beneficiaries with protection from creditors, divorce, bankruptcy and estate taxes, all while allowing for distributions over a beneficiary’s lifetime.

How Does an Irrevocable Trust Work?

Irrevocable Trusts are often created for very specific, sometimes limited purposes, such as asset protection, estate tax reduction, income tax reduction, gifting, or eligibility for certain government benefits. Often, when you create an Irrevocable Trust, you give up the ownership and control of whatever assets are placed in the Trust.

A properly designed Irrevocable Trust will consider a number of variables, such as:

1. Whether the assets of the Trust should be included in the estate of the Donor for important income tax benefits, or whether the assets should be \excluded from the estate of the Donor for estate tax savings;

2. Whether the transfer to the Trust should be a completed gift (often requiring the filing of a gift tax return – Form 709) or should be an incomplete gift – meaning the Donor may change who will ultimately receive the gift;

3. When the income of the Trust is received by a beneficiary, whether the income tax liability will stay with the beneficiary or be shifted to the Donor. When the tax is paid by the Donor, it is done so without a gift tax consequence, which can significantly increase the perceived value of the assets given to the Trust;

4. After the death of the Donor, whether the income taxes should be paid by the Trust or by the beneficiary (often Trust tax rates are quite high, so having the beneficiary bare the tax planning burden – even if the income is retained by the Trust – is a money-saving choice);

5. Where the Irrevocable Trust should be established – in Massachusetts or in a state with more favorable Trust laws;

6. The choice of Trustee – the beneficiary or a professional Trustee; and

7. What distributions should the Trust authorize? Generally the best asset protection can be achieved if the Trust is purely discretionary – so that the Trustee may decide what, if any, distributions will be made and when they will be made.

Each decision will impact how the Trust will work and the degree of benefit it can convey. But if you create an Irrevocable Trust, you must remember that it is not reversible. Generally, the assets you gift to an Irrevocable Trust cannot be given back to you.

However, in some Irrevocable Trusts, the Donor may be given the power to “swap” assets with the Trust. But possessing such a power does have income tax consequences, and it is not advisable to include a swapping power in an Irrevocable Medicaid Planning Trust.

What Are Some Specific Examples of Irrevocable Trusts?

Irrevocable Trusts can hold and then distribute assets to a beneficiary weeks, months, or even years after your death. Examples of Irrevocable Trusts include:

#1: A Capital Gains Avoidance Trust

A Capital Gains Avoidance Trust is an Irrevocable Trust to which you give highly appreciated assets. The Trust then sells the highly appreciated asset. Normally, the sale would trigger a capital gains recognition, resulting in income taxes.

But because of the way this Trust is designed, after the sale, the entire proceeds from the sale of the highly appreciated asset may be reinvested without payment of capital gains taxes. Instead, an income stream is paid to the beneficiary (who is usually the Donor), and as the income is received, capital gains taxes are paid on a portion of the income payment.

When the beneficiaries die, whatever remains in the Trust, if anything, is paid to a charity of the Donor’s choice. This Trust lets you avoid the capital gains tax when you sell appreciated real estate, stocks, or other capital assets. This type of Trust can be structured so that the capital gain is spread out over many years, thereby reducing the total tax paid. This Trust is also sometimes called a Charitable Remainder Trust.

#2: An Irrevocable Life Insurance Trust

An Irrevocable Life Insurance Trust is a Trust designed to own a life insurance policy. It controls and owns your life insurance policy while you are alive, and it manages and distributes the proceeds from the policy after your death.

Many people know that life insurance death benefits are generally not subject to income tax, but when life insurance is owned by the insured, it is a part of the owner’s taxable estate and therefore subject to estate taxes.

By having your life insurance owned by an Irrevocable Life Insurance Trust, not only will the death benefit pass free of income tax, it will also pass free of estate tax.

#3: A Domestic Asset Protection Trust (DAPT)

A Domestic Asset Protection Trust is a self-settled Irrevocable Trust that is intended to protect your assets from potential future creditors. Currently nineteen states recognize some form of a self-settled Asset Protection Trust, but Massachusetts is not one of those states.

Even though Massachusetts does not yet recognize these Trusts, the use of DAPTs can have an important role in your estate plan. These Trusts can be used to reduce the Massachusetts estate tax in addition to providing asset protection.

#4: A Spousal Limited Access Trust (SLAT)

A Spousal Limited Access Trust is another tool that may provide asset protection and estate tax reduction benefits in Massachusetts. This type of Irrevocable Trust is similar to a By-Pass or Credit Shelter Trust that is established as a lifetime gift instead of a gift to the spouse at the time of the Donor’s death. Trust assets are available for the needs of a spouse but are not owned by the spouse.

Because Massachusetts does not have a state level gift tax, and because the federal lifetime exemption is so high, using SLAT can have significant Massachusetts estate tax reduction benefits by exempting Trust assets from the estates of both the Donor and the Donor’s spouse.

#5: A Medicaid Planning Trust (MPT)

A Medicaid Planning Trust, sometimes called an Irrevocable Income Only Trust (IIOT) is a special Trust with a very limited purpose. A Donor will establish this kind of Trust if s/he intends to preserve the estate from the cost of nursing home care.

COVID-19 has certainly done some damage to this type of Irrevocable Trust – a recent article in the Boston Globe revealed that nearly 62 percent of all COVID-19 related deaths in Massachusetts occurred in nursing homes and rest homes.

Since this type of Irrevocable Trust is set up to make the Donor eligible for state-paid nursing home care, it is now less attractive to use this kind of Trust, given the deadly mix of virus-susceptible nursing home residents and COVID-19.

Unfortunately, what most people who use this Trust don’t realize is that the principal placed into this type of Trust is NEVER available for the use of the Donor or the Donor’s spouse. The Trust assets may only be used to produce income for the Donor or the Donor’s spouse. Five years after the assets are given to the Trust, the assets are protected from the Medicaid look-back rules (the “five-year look-back”).

What is the Main Problem With an MPT?

However, the problem with this type of Trust is its lack of flexibility. An MPT can not include any provisions for amending the Trust. Furthermore, it should not include any ability for the Donor to “swap” assets with the Trust.

While assets in these Trusts are protected from nursing home expenses after the five year look-back period has passed, the assets can not be used for most assisted living arrangements (which most people need before they need nursing home care).

Additionally, most people desire in-home care, but the assets in an MPT are not available to be used that way, in most cases. However, these Trusts may make sense if you have a diagnosis that will definitely require you to reside in a nursing home.

Understanding the Limitations of an MPT is Imperative

But before setting up this kind of Trust, you must understand the limitations on you and your spouse. If you die first, your spouse will need to live with the restrictions of this Trust – and the assets will still be unavailable to your spouse.

Consider this: the average cost of nursing home care in Massachusetts is approximately $130,000 to $150,000 per year (as of 2020). The average stay is approximately two years. So, the total cost is approximately $300,000.

Certainly, that is a lot of money. But what is the total value of your estate? Add up the value of everything you own – real estate, retirement accounts, investments, bank accounts, life insurance, etc. Does it make sense to you to give away the total value of your estate, making it forever unavailable for the needs of you and your spouse, to save a rough average of $300,000?

If you answer “yes,” then this type of Trust may be appropriate. The bottom line is this: if an attorney is suggesting an MPT for you, be sure to ask a lot of questions. Make sure you understand the lifetime ramifications of this kind of Trust.

If you are told there is a back door, or that there can be a tacit understanding with the kids that the assets of the Trust may somehow be returned to you, then Massachusetts (MassHealth) will take the position that the assets ARE available to pay for your nursing home care. Yogi Berra said it best: “If you don’t know where you are going, you’ll end up someplace else.”

What Steps Are Required to Create an Irrevocable Trust?

To establish an Irrevocable Trust in Massachusetts:

1. Identify the properties and assets that you want to move into the Trust.
2. Determine your beneficiaries.
3. Determine who is qualified to act as the Trustee.
4. Have a qualified Massachusetts estate planning lawyer prepare the Irrevocable Trust.
5. Transfer the appropriate assets to the newly formed Irrevocable Trust.
6. Let the Trustee manage the Trust – don’t try to manage it for the Trustee.

Is It Really Irrevocable?

To create an Irrevocable Trust and to take advantage of the benefits it offers, the terms of an Irrevocable Trust must prevent you from revising or amending it. Can an Irrevocable Trust ever be changed or amended? The answer is no, not by the person who creates it.

In rare cases, however, beneficiaries or the Trustee may be able to make a change to an Irrevocable Trust when such a change is in the best interests of a beneficiary and is not in conflict with the intentions of the person who created the Trust (the “Grantor” or “Donor”).

For example, if you designate assets for a child’s or grandchild’s education, but after your death the child or grandchild develops a serious medical condition that requires costly treatment, your Trustee may seek a modification that will allow the Trust’s funds to pay for necessary treatment.

Upon a Grantor’s death, a Trustee becomes responsible for the administration of the Trust. By working with the right Cape Cod estate planning attorney, a Trustee in Massachusetts can obtain the sound legal advice needed for proper administration of the Trust at every stage of the process.

What’s Right for You?

Every estate plan is unique, so an Irrevocable Trust may or may not be right for you. But without the right estate plan, the Internal Revenue Service (IRS) or the Massachusetts Department of Revenue may be able to take a significant portion of your family’s assets after your death.

A good estate plan is a smart idea for everyone, regardless of age, health, or financial status. Although no one knows what tomorrow may bring, the proper estate plan will provide for your loved ones and put them in the best possible position to deal with whatever the future holds.

The right Massachusetts estate planning attorney will answer your estate planning questions, address your concerns, and provide the legal services and personal assurances you need to help you create the best possible estate plan for you and your family.