It’s been a while since we’ve touched on the basics of trusts and some people have been asking for a basic primer on the different types of trusts and what would be the best use of a trust for their specific situations.
What is a Trust in New York?
A trust is a legal entity that holds assets for beneficiaries.
While there are many different types of trusts, I am going to focus on the two main categories of trusts, a Revocable Trust, which is sometimes known as a living trust and can change in real-time and an Irrevocable Trust, which unlike the former, cannot be altered or revoked (certain exceptions for a power of appointment to change class of beneficiary or trustee.)
Trusts are used for a variety of reasons including the convenience of avoiding probate, a time consuming process; asset protection and tax considerations. Trusts also allow you to provide instructions for the care of your property and finances if you become incapacitated. There are family trusts, business trusts, blind trusts, (ILIT) Irrevocable life insurance trusts, SLAT (spousal lifetime access trust), Special Needs trust, charitable remainder trusts, etc. These are different topics for another time.
What Are the Benefits of a Revocable Trust
Life is unpredictable, so the biggest benefit of a revocable trust is the flexibility and the ability for the grantor to change it, modify it and even revoke it, at any time.
It also assists in avoiding having to go through the lengthy and often expensive probate process to have a fiduciary appointed by the Court. It is private and allows the successor trustee (the person who takes it over after the initial trustee passes) the ability to do what is necessary to distribute trust assets without waiting for the Court. Many people call this “ease of probate.” Because the trustee is already the legal owner of the property, no one needs to be appointed by the Court.
Think about the changes you’ve gone through in your own life and the people (including family) in which relationships have deeply changed. With this trust, the grantor remains the trustee and the beneficiary until the time of their death. After that time, the trust becomes irrevocable.
There is a downside to consider, as there are with all the decisions we make in life. With a revocable trust, there is no asset protection from creditors, so a creditor (such as Medicaid) can put a lien on the property.
You also have to consider that this trust may be subject to estate tax. This comes into play if the estate value exceeds the applicable tax threshold for your state and/or the federal government. This is because the grantor retains control over the assets of the trust, and is still considered the owner for tax purposes. (Note that the 2025 New York estate tax threshold is $7.16 million. Estates valued below this threshold are exempt.)
A revocable living trust retains the “step-up-in-basis” meaning that the beneficiaries inherit the date of death value and are not subject to capital gains as of that date. For example, the parents purchased a home in 1963 for $50,000; when they die, it is worth $900,000. Without that date of death value step-up-in-basis, the heirs would have to pay capital gains.
What Are the Benefits of an Irrevocable Trust
With an irrevocable trust, you are afforded creditor protection, because you no longer own that property; the Trust owns it. In addition, the trust assets are removed from taxable estate.
An irrevocable trust is helpful when planning for Medicaid because the grantor legally transfers their assets out of their name. When Medicaid performs a look-back to determine eligibility for care, those transferred assets are not considered.
In New York, a Medicaid look-back is a five year period before you apply. The reason this is done is for the government to assess your financials and determine if you gave away money or property (under the fair value) which could result in a penalty period, during which time you would be required to pay out of pocket for your care. Nursing home expenses can be extremely costly and any amount of time you aren’t covered could become a huge burden financially.
The cons to an irrevocable trust are its permanence and the act that the grantor must give up “control” of the assets. They can be complex. Generally, without court approval or the consent of beneficiaries, it cannot be changed or revoked. As mentioned above, with possible challenges in family dynamics or unexpected changes to your life, both positive and negative, you’ve given up control of your assets and are now limited in actions.
Another drawback is that irrevocable trusts do not automatically get the step-up-in-basis as of the date of death. According to an IRS ruling in 2023, if assets in an irrevocable trust are not included in the grantor’s taxable estate for estate tax purposes, they are not eligible for the basis step-up. But, the New York estate tax threshold is currently $7.16 million and the Federal estate tax threshold is currently $13.99 million per person. So, we draft the trust so that the assets are still included in the grantor’s taxable estate.
Everyone’s situation is different and each requires different planning. We need to thoroughly review your goals and needs to determine what is best for you. There are vital questions to consider when choosing the type of trust that works for you and at Sugarman Law, we are experts on estate planning and New York trust law and are here to help.
