Many people in California are familiar with the Revocable Living Trust. Revocable Living Trusts keep trust assets outside of a conservatorship, should the settlor become incapacitated, and also outside of a probate when the settlor dies. Revocable trusts, however, offer no asset protection to the settlor personally, although they can be used to provide the death beneficiaries with asset protection if inheritances are held in further trust.

Few people, however, are familiar with Irrevocable Trusts, generally, or the Irrevocable Grantor Trust, specifically. Let us discuss revocable and irrevocable trusts and see how the Irrevocable Grantor Trust can be particularly useful for persons who have or are receiving Medi-Cal.

Assets held in Grantor Trusts, including Revocable Living Trusts, are treated as owned by the settlor for income tax purposes: All income generated by income producing assets owned by a grantor trust are taxed to the settler(s) personally. Some irrevocable trusts also qualify as grantor trusts provided the settlor has retained certain special rights. Grantor Trust tax status is important because trusts, unlike natural persons, are subject to very compressed income tax tables: Trusts are taxed at the highest marginal income tax rate once their taxable income exceeds $12,300.

Revocable trusts become irrevocable non grantor trusts upon the death of the settlor(s); at which time the successor trustee obtains a taxpayer identification number. Irrevocable Trusts are so named because they cannot be amended or revoked at will by the settlor(s). They can sometimes be modified or terminated by court petition with the consent of all the beneficiaries and, when not all beneficiaries consent, with the additional the consent of the settlor. Irrevocable Trusts can also, if the trust expressly provides, be modified or terminated by a so-called “Trust Protector”, to the extent allowed in the trust instrument. A Trust Protector is someone other than the settlor, the settlor’s spouse, or a trust beneficiary; someone whom the settlor trusts, often a very close friend or relative.

Provided there is at least another beneficiary besides the settlor, an irrevocable trust, with limited exceptions, affords the settlor asset protection against claims by his or her future creditors. That is, claims by creditors where the underlying circumstances that give rise to the claim take place after the assets were transferred into the trust. Subsequent asset transfers by the settlor into an irrevocable trust can be found to be so-called “Fraudulent Conveyances” and as such be reversed by a court to protect a creditor’s legal rights.

Irrevocable Trusts can provide the settlor with certain lifetime benefits, such as the right to live in any residence owned by the trust, so long as there are other beneficiaries in addition to the settlor. As a grantor trust, any gain on the sale of a residence whose value has appreciated will be sheltered by the $250,000 exemption (or $500,000 exemption in the case of a married couple) on the sale of what was one’s principal residence for two years out of the past five years ending with the sale of the residence.

An Irrevocable Grantor Trust, therefore, can be used to remove a person’s residence from his or her estate prior to death. Doing so is important to persons who have received Medi-Cal. Only assets still held in their estate at time of death are subject to Medi-Cal Estate Recovery claims.

Lastly, the settlor can also retain a Limited Power of Appointment to appoint trust assets to anyone other than the settlor him or herself, the settlor’s estate, the settlor’s spouse and the creditors of the settlor’s estate. Thus, the settlor retains the power to decide which loved ones and/or charities receive his or her trust estate after his or her death.

“Serving Lake and Mendocino Counties for nineteen years, the Law Office of Dennis Fordham focuses on legacy and estate planning, trust and probate administration, and special needs planning. We are here for you. 870 South Main Street Lakeport, California 95453-4801. Phone: 707-263-3235.”