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An irrevocable trust in Wisconsin is a legal arrangement used in estate planning. Common irrevocable trusts include Medicaid Asset Protection Trusts and Special Needs Trusts. In each of these, assets transfer from a settlor to a trustee for the benefit of named beneficiaries. Irrevocable trusts cannot be changed or terminated without the beneficiaries’ consent.
The two main types of trusts are revocable trusts and irrevocable trusts. The biggest difference between the two is that in an irrevocable trust, the settlor no longer controls the assets within the trust. Instead, all changes must be approved by mutual agreement from the beneficiaries, which is often a very difficult task. Irrevocable trusts are less flexible once created, but they do have certain advantages.
There are a few reasons a person may choose to relinquish control over their assets and form an irrevocable trust.
Assets within an irrevocable trust are no longer owned by the settlor and therefore cannot be pursued by most creditors.
Because irrevocable trusts are extremely difficult to change, they protect your decisions when there is distrust within a family.
An irrevocable trust can, when used properly as a part of a tax strategy, reduce the settlor’s taxable income or reduce the federal estate tax.
All trusts offer greater control and flexibility when it comes to asset distribution. Without a trust, all assets are distributed upon an individual’s death. Trusts can be set up to distribute assets upon beneficiaries hitting specific milestones or other criteria.
Because irrevocable trusts are more or less set in stone, they are often chosen with a specific purpose in mind.
There are a few ways to set up a charitable trust. A Charitable Remainder Trust provides income to the settlor or other beneficiaries for a set amount of time and then the remaining assets after that time are given to a specified charity tax free. In this set up, the settlor or beneficiary gets income or distributions now and the tax advantages of giving to a charity.
In a Charitable Lead Trust, it works in the opposite direction. The trust provides income to the named charity for a specified period of time, and then after that time has passed the remaining assets go to the beneficiaries. The settlor both supports charities that matter to them and still provide an inheritance to their heirs.
In either scenario, the irrevocable trust is used to support both charities and other beneficiaries in a tax advantageous way.
If there is a disabled dependent in your life, a special needs trust (SNT) is often the best estate planning vehicle to use to provide for them during their lifetime without them losing access to needs-based government benefits.
If the beneficiary is disabled, as defined by the social security administration, then a SNT can be used to provide them with supplementary income without disrupting their Supplemental Security Income (SSI) or Medicaid benefits.
The assets must be used for approved purposes, so trust administration is particularly important for SNTs to ensure the spending rules are followed appropriately. Generally speaking, funds can be used for:
This type of trust allows individuals to qualify for Medicaid while still preserving their assets for their heirs to inherit. It’s often used when planning for long-term senior care. Since Medicaid is a need-based government benefit, individuals can only qualify if their income and assets are under a specific threshold.
Due to the large ongoing costs of senior living facilities and nursing homes, even a reasonably sized estate may be entirely depleted within a few years, leaving nothing for heirs to inherit. A Medicaid asset protection trust is a way to qualify for Medicaid while still leaving your estate to be inherited by your heirs.
A Medicaid asset protection trust is a good option for people who anticipate needing long term care in the medium term (at least five years from now). Using a MAPT has some benefits, but it also has risks to consider.
The biggest advantage of a Medicaid asset protection trust is it allows individuals to pay for long-term care with Medicaid while still preserving an inheritance for their beneficiaries.
The median cost in Wisconsin for an assisted living facility was over $66,000 per year as of 2023. If a nursing home is required, that median cost increases to over $120,000.
It’s difficult to predict how long one might need long-term care as they advance in age, but it’s easy to see how it may become difficult to afford and deplete a person’s legacy while they are still living. Those costs can be covered by Medicaid, but only if the individual qualifies based on their assets and income.
An irrevocable trust isn’t for everyone. When you use an irrevocable trust, you no longer own those assets, and a lot of control is given to the trustee. That is true for all irrevocable trusts. There are a few disadvantages unique to Medicaid asset protection trusts.
Medicaid Look Back Period: When you apply for Medicaid, they examine all financial transactions within the last five years to determine eligibility. That means that the trust must be created and funded more than five years before you intend to apply for Medicaid.
Fewer Long-Term Care Options: Not every long-term care facility accepts Medicaid. If you plan on utilizing Medicaid in order to be able to afford long-term care, you may be disappointed in the options available. Higher end facilities with greater amenities often require paying out of pocket.
There are numerous estate planning options to choose from. Before you create an irrevocable trust, talk to an attorney at Grieve Civil Law about your goals to ensure that’s the best option for you and your family. Once you have decided to create an irrevocable trust, the attorney will help you set it up.
Decide on how your assets will be distributed and who your beneficiaries will be. This is a particularly important step for irrevocable trusts, since the settlor will not be able to unilaterally change the terms once the trust is created.
The trustee will have control over the assets within the trust, so it’s essential the settlor chooses someone reliable and competent. If you do not have someone you know personally to fill this role, a professional can be hired.
The attorney will take everything you’ve discussed and draft the trust document to reflect your wishes. You’ll meet to review and sign the document, with the appropriate witnesses to make it legally binding.
Identify all the assets you want to belong to the trust and transfer them into the trust. This can include bank accounts, investment portfolios, real estate, and more. Anything not transferred to the trust will not be distributed according to the trust’s terms and will still be subject to probate and can be counted in the Medicaid Asset Assessment or otherwise count against need-based program requirements.
After the trust is created, the settlor relinquishes control over the trust and the assets within and the trustee controls the trust. The trustee is responsible for managing the trust according to its terms.
An irrevocable trust is not intended to change, however sometimes there are special circumstances. If the trustee and all beneficiaries agree, a Nonjudicial Settlement Agreement (NJSA) can be used to clarify any ambiguous terms or to make minor changes that remain in line with the trust’s original purpose.
There are also scenarios where it may be possible to “decant” a trust–take the assets of one trust and move them to a new, updated trust. If there are no established avenues to make the desired change, you can petition the court.
Generally, the terms of the trust will dictate when the trust is terminated. It’s often upon the death of the settlor or of the beneficiary.
If the termination of the trust is not dictated by its terms, then terminating the trust may be done by petitioning the court or through a Nonjudicial Settlement Agreement. That would be done if the trust’s assets are so depleted it is no longer practical or economical, or if the trust’s purpose has been achieved.
Contact one of our estate planning lawyers to create your irrevocable trust
