REVOCABLE OR IRREVOCABLE: THAT IS THE QUESTION!
When a client comes in to our law firm for the first time, they usually ask us to explain the basic concepts of estate planning and to make recommendations on how they should proceed. Our attorneys will share with the client how doing a plan with us can help to protect them and their family from losing their assets to: Probate; Conservatorship; Estate Taxes; Lawsuits; Divorces; and Nursing Home Costs.
We often discuss the pros and cons of a Revocable Trust versus an Irrevocable Trust. Interestingly, the Revocable trust can only help protect against Probate and Conservatorship. An Irrevocable Trust can effectively protect assets against Probate and Conservatorship, as well as against estate taxes, lawsuits, divorces, and nursing home costs.
Many people are afraid of an Irrevocable Trust. The word “Irrevocable” sounds scary to them. They think it means they have to give up all control over their assets forever. They have been warned by their misinformed friends that it’s not as good as a Revocable Trust. That is simply not true.
Both the Revocable and Irrevocable Trust are useful tools. You just have to know which one should be used in the appropriate situation. For example, if someone asked you, “Which is better, a hammer or a screwdriver?” the answer would depend on whether you need to pound in a nail or twist in a screw, right? Well, the same thing applies in deciding which kind of trust to use for the bulk of your assets.
For those of you who are worried about getting sued in the future; or protecting the assets you leave to your children from a potential divorce; or the risk of possibly going to a nursing home and paying $10,000+ per month until you run out of money; a properly drafted Irrevocable Trust tailored to your situation could be EXACTLY the tool you need.
For most of our clients and potential clients, their home is their most valuable asset and the one with the most sentimental value, which they would like to save and protect for their family members. If you feel the same way, you can use an Irrevocable Trust in such a way that: (1) You will still have the right to live in your home for the rest of your life; (2) nobody can kick you out of your home; (3) you can keep your homeowner’s exemption for annual county property taxes; (4) you can avoid probate for your heirs when you pass away; (5) your heirs will get a “stepped-up basis” in your house for capital gains tax purposes after you pass away (this means they could sell it after you die and pay no tax on the profit); (6) you can direct the trustee to sell the property during your lifetime, and you can keep the $250,000 exemption from capital gains tax on the sale of your principal residence (or $500,000 for married couples filing jointly), even though the Irrevocable Trust owns it instead of you (this means the Trust can sell it during your lifetime and pay less or no tax on the profit); (7) your home and any other assets in the Irrevocable Trust can be protected from your creditors and from future law suits; and (8) perhaps most importantly, after a 5-year lookback period (or a shorter time if we do a crisis Medicaid Eligibility Plan), you can get Medicaid to pay for your nursing home costs and protect your home from a Medicaid Recovery Lien.
You have to be careful about choosing the right law firm to represent you, however. We have seen horror stories with clients who have come to us AFTER they went to a different law firm that put them in a bad Revocable or Irrevocable Trust, which was costly and difficult to unravel and redo correctly. Because it’s Irrevocable, it can be really difficult to undo if the other lawyer doesn’t build as much flexibility into their wording of the Irrevocable Trust as we usually do.
We have seen many situations where clients paid another lawyer $7,500 to $14,000 for an Irrevocable Trust plan to protect their home and other assets from nursing home costs after the 5-year lookback period—and the Irrevocable Trust that the other lawyer wrote doesn’t even work at all for that purpose!! Their fees were 50% to 200% more than our law firm and the client had to hire us to fix it after the fact anyway.
In a recent crisis situation, a client came to us after spending 18 months and over $80,000 on another law firm trying to qualify for Medicaid to pay for nursing home costs. That other law firm reeled the client in by arranging an hourly billable rate and (incorrectly) assuming it wouldn’t take them very many hours to get qualified. But the lawyer at the other firm isn’t an expert in Medicaid qualification law and quickly racked up an exorbitant bill with no results. When the client finally found our law firm, we were able to quickly get them qualified for Medicaid with our standard flat rate Medicaid Eligibility Plan at a fraction of the cost they had wasted on the other law firm. We have other examples in Asset Protection from law suits and conservatorship as well.
In conclusion: The two points to take away from this article are: (1) For those of us in our golden years, an Irrevocable Trust could very well be the BEST solution; and (2) See an expert at Okura & Associates as soon as you can to make sure you accomplish YOUR estate planning objectives; come with an open mind, and don’t just listen to your friends’ opinions about what is the right thing to do. At the very least discuss your needs and concerns with a law firm that specializes in the type of planning you need and ask them the hard questions to make sure they’re the right lawyers for the job.
OKURA & ASSOCIATES, 2016
Honolulu Office (808) 593-8885
Hilo Office (808) 935-3344
Ethan R. Okura received his Doctor of Jurisprudence Degree from Columbia University in 2002. He specializes in Estate Planning to protect assets from nursing home costs, probate, estate taxes, and creditors.
This column is for general information only. The facts of your case may change the advice given. Do not rely on the information in this column without consulting an estate planning specialist.