Latest / The Financial Exchange Show / Ask Todd: Life Estates vs. Irrevocable Trusts: What Are You Really Giving Up?

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Ask Todd: Life Estates vs. Irrevocable Trusts: What Are You Really Giving Up? · The Financial Exchange Show

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  Speaker 1: This is Ask Todd on the Financial Exchange Radio network.
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  Speaker 1: If you have an existing estate plan or in the
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  Speaker 1: market for one, Todd Letsky is here to answer your
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  Speaker 1: questions and help you plan for a later life. Ask
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  Speaker 1: Todd is presented by Cushing and Dolan, serving Massachusetts and
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  Speaker 1: New England for more than thirty five years, helping families
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  Speaker 1: with a state and tax planning, medicaid planning, and probate law.
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  Speaker 1: Visit Cushingdolan dot com. Now here's Todd Lutsky.
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  Speaker 2: Todd Lutsky from the law firm of Kushigan Dolan now
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  Speaker 2: joins us here and he's here for Ask Todd. Which
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  Speaker 2: is your chance to ask Todd your estate planning questions
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  Speaker 2: and he'll answer them live on air. Actually, yes, that's right,
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  Speaker 2: he'll answer them live on air. Phone lines are wide
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  Speaker 2: open at eight eight eight to zero five two two
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  Speaker 2: sixty three. That's the N'm going to call to ask
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  Speaker 2: Todd your estate planning questions again. Eight eight eight to
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  Speaker 2: zero five two two six three. We can usually get
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  Speaker 2: through two or three of these puppies, so get on
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  Speaker 2: the horn and give us a call so that you
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  Speaker 2: can chat with Todd again. Eight eight eight two zero
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  Speaker 2: five two two six three is the number, mister Lutsky.
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  Speaker 2: How's it going today?
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  Speaker 3: You know it's going never better? How are you doing?
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  Speaker 3: Uh good?
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  Speaker 2: Came across something interesting the other day, though.
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  Speaker 3: You always do.
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  Speaker 2: Found a guy kayaking in my attic.
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  Speaker 3: Yesterday, kayaking in your addict.
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  Speaker 2: Yeah, it turns out he was a ceiling rafter. Oh yeah,
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  Speaker 2: I guess so I wasn't expecting. Now, Todd, want to
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  Speaker 2: talk a little bit about, uh, irrevocable trust. I know
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  Speaker 2: we've talked a lot about life estates the last couple
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  Speaker 2: of weeks and quite honestly kind of tired of talking
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  Speaker 2: about I can't do life estates anymore.
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  Speaker 3: Okay, but okay, go, I'm gonna let you take this
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  Speaker 3: one away.
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  Speaker 2: So I'm gonna I'm gonna talk about kind of that,
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  Speaker 2: the other option that a lot of people consider instead
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  Speaker 2: of a life estate, irrevocable trust. How much does the
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  Speaker 2: use of an irrevocable trust to protect an asset impact
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  Speaker 2: your day to day life versus a life estate. See,
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  Speaker 2: I brought it back to the life estate.
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  Speaker 3: You did, and I'm going to connect the two for you.
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  Speaker 3: But thank you for that. So, you know, one of
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  Speaker 3: the things we talk about in this guide is the
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  Speaker 3: right way and the wrong way to do a life estate.
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  Speaker 3: But if you're going to do a life estate, i'll
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  Speaker 3: i'll call it the less bad way would be to
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  Speaker 3: take the remainder interest of a life the remainder interest
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  Speaker 3: of a piece of property and give it to an
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  Speaker 3: irrevocable trust. Okay, connecting the two here, put it in
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  Speaker 3: an irvocal trust. So if the there are like three
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  Speaker 3: times in my guide that I recommend when you should
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  Speaker 3: use a life estate, and when you're going to use
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  Speaker 3: any of those three times involve an irrevocable trust, and folks,
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  Speaker 3: and I think the great analogy between and the question
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  Speaker 3: is is spot on in the sense that what's the
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  Speaker 3: difference between just throwing the whole darn thing into an
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  Speaker 3: irrevocable trust versus a life estate. People think they give
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  Speaker 3: up control with a life estate, but think about how
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  Speaker 3: much control you give up with a with a life estate. Right,
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  Speaker 3: So there's your compare and contrast. When you put the
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  Speaker 3: hands of the property, When you put the property in
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  Speaker 3: the hands of a child, you know you're gonna have
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  Speaker 3: trouble selling it without their permission. You're gonna have adverse
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  Speaker 3: capital gain tax consequences because the kids are going to
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  Speaker 3: get a big chunk of the money if they do
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  Speaker 3: agree to sell it. They don't get a capital gains
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  Speaker 3: exclusion when you go to sell the property because they
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  Speaker 3: don't live there. And again back to the hoping you
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  Speaker 3: get even get their permission to do it, And the
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  Speaker 3: biggest problem is you didn't get much of the money
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  Speaker 3: because there's an allocation based on your age that a
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  Speaker 3: large portion, depending on how old you are, goes to
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  Speaker 3: the kids. So now you don't even have the money
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  Speaker 3: you need to buy another house if you sell your house.
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  Speaker 3: So to me, when you think about irrevocable trusts and
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  Speaker 3: the word control, I would say with a life estate,
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  Speaker 3: if I'm not using an irrevocable trust, I've given up
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  Speaker 3: way more control than I would give up if I
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  Speaker 3: used an irrevocable trust, Because with an irrevocable trust, I
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  Speaker 3: put the remainder interest in their kid's name is not
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  Speaker 3: on the property, There is no completed gift. I don't
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  Speaker 3: need anyone's permission to sell the property. You still control
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  Speaker 3: the trustee, you still control the ability to sell it.
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  Speaker 3: You have no adverse capital gains tax when you go
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  Speaker 3: to sell it. When it's in a grant or irrevocable trust,
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  Speaker 3: you get your entire capital gains exclusion, offsetting the entire
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  Speaker 3: gain or a portion of the gain, depending on how
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  Speaker 3: large it is. So there's no adverse tax consequences, and
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  Speaker 3: maybe most importantly, all the money is available to buy
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  Speaker 3: another house because most of it is in the irrevocable trust.
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  Speaker 3: And it doesn't even restart the five year waiting period.
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  Speaker 3: And your kids don't have any there's no credit or
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  Speaker 3: issues with your kids getting divorced while you're alive. So
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  Speaker 3: great question, and I think I hope you see the
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  Speaker 3: difference between life estates alone any irrevocable trust.
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  Speaker 2: Talking with Todd Lutsky from Cushing and Dolan, still room
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  Speaker 2: five two two sixty three. That is the number to
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  Speaker 2: now eight eight eight to zero five two two six three.
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  Speaker 2: We're gonna take a quick break here, but when we
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  Speaker 2: come back, we're gonna get to those questions for Todd again.
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  Speaker 2: That phone number is eight eight eight two zero five
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  Speaker 2: two two six three, and uh again, only have space
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  Speaker 2: for a couple, so one more time That number is
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  Speaker 2: eight eight eight to zero five two two sixty three.
• 5:47
  Speaker 1: Ask Todd with Todd Letsky every Wednesday at ten thirty
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  Speaker 1: only here on the Financial Exchange Radio Network. Todd Letsky
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  Speaker 1: answers your questions about a state and elder life planning
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  Speaker 1: Wednesday at ten thirty, right here on the Financial Exchange
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  Speaker 1: Radio Network.
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  Speaker 2: Talking with Tom Lutsky from the law firm of Cushing
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  Speaker 2: and Dolan. Reminder, if you've got questions for Todd, this
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  Speaker 2: is your chance to ask them live on air. Eight
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  Speaker 2: phone lines here, so please get calling it eight eight
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  Speaker 2: eight to zero five two two sixty three to ask
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  Speaker 2: Todd your estate planning questions. Let's go first to Sean
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  Speaker 2: in Monson. Sean, what is your question for Todd?
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  Speaker 4: Good morning Todd, and good morning. I very much enjoy
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  Speaker 4: Todd listening to your advice on this program. My question
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  Speaker 4: for here, my question to you is, I've been advised
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  Speaker 4: at one point to get a Medicare trust protect our
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  Speaker 4: property from the nursing home. Okay, and I'm wondering I
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  Speaker 4: hear you talk about irrevocable trusts very frequently, and I'm
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  Speaker 4: wondering does the irrevocable cover in a medicare situation or
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  Speaker 4: can it? Or are the two different things?
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  Speaker 3: No, So, yeah, you're you're right about the fact that
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  Speaker 3: you're saying you're you're kind of saying a Medicare trust
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  Speaker 3: when when in reality, what I think you're saying is
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  Speaker 3: and there's no such a term about medicaid is what
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  Speaker 3: you're thinking about. I know they use the terms so closely.
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  Speaker 3: Medicaid is what you want to be able to apply
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  Speaker 3: for when you're in a nursing home, and when you're
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  Speaker 3: in a nursing home if the assets are in an
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  Speaker 3: irrevocable trust. And and remember that, folks, there are many
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  Speaker 3: kinds of irrevocable trusts, and and we do talk about
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  Speaker 3: different kinds of irrevocable trust but we tend to spend
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  Speaker 3: a little more time And you're right about this on
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  Speaker 3: irrevocable Medicaid trusts. And yes, they are absolutely designed to
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  Speaker 3: protect assets from the cost of long term care. In
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  Speaker 3: other words, you would take your home and quite frankly,
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  Speaker 3: maybe some of your other assets, depending on you know
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  Speaker 3: what they are and whether it makes sense to put
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  Speaker 3: them in there like money investment portfolios now now not
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  Speaker 3: qualified plan money, but other money into the trust. And
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  Speaker 3: then you know, five years from the time that you
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  Speaker 3: do this, if you get sick after that, you or
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  Speaker 3: your spouse get sick after that, then these assets that
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  Speaker 3: you put in there are like you don't own them.
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  Speaker 3: It looks to the nursing home like they're not yours.
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  Speaker 3: And then they would be you know, not available. When
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  Speaker 3: I say protected, I mean not available for the nursing home,
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  Speaker 3: not available to make you ineligible for Medicaid benefits or
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  Speaker 3: ineligible for the state to help pay for the nursing
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  Speaker 3: home costs. So you're spot on. These are the kinds
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  Speaker 3: of trusts that we talk about that will protect the
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  Speaker 3: asset from the cost of long term care. And depending
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  Speaker 3: on the size of your estate, I think it probably
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  Speaker 3: makes sense for you to you know, sit down with
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  Speaker 3: an attorney and that does this and learn in more
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  Speaker 3: detail than I can give you on the radio, how
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  Speaker 3: in fact they work, and how much control you can
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  Speaker 3: keep and how you really I can just tell you
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  Speaker 3: that they won't really disrupt your life, you know, at all,
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  Speaker 3: and you'll still get this protection from the nursing home
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  Speaker 3: and avoidance of probate, and depending on the size of
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  Speaker 3: your state, even a reduction from your Massachusetts estate tax liability.
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  Speaker 3: So hopefully that helps a little. And thanks for the
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  Speaker 3: kind words earlier folks. This approach, this eoretical bull approach
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  Speaker 3: that we just talked about, I think might be better
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  Speaker 3: than the life estate. But a lot of people have them.
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  Speaker 3: They're not horrible, they do work, they do have benefits.
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  Speaker 3: There are pros and cons to life estates, but a
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  Speaker 3: lot of people have them. And that's why we did
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  Speaker 3: this guide calculating the consequences of a life estate. Why
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  Speaker 3: because people have them and it seems to be a
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  Speaker 3: quick fix, not always great. Again, pros and cons? How
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  Speaker 3: much control do I give up? What can I do
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  Speaker 3: after I have it? Can I change my mind as
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  Speaker 3: to who gets it? Can I sell? Can I buy
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  Speaker 3: another house? What are the you know, what are the
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  Speaker 3: capital gains? Tax consequences? Folks? If you've got one of
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  Speaker 3: these life estates, call and get the guide and learn
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  Speaker 3: what you actually have. If you're thinking about getting one,
• 10:21
  Speaker 3: call and get the guide so you can find out
• 10:23
  Speaker 3: what they are before you decide to get one. And finally,
• 10:27
  Speaker 3: how best to do them and when to do them
• 10:30
  Speaker 3: eight six six eight four eight five six nine nine
• 10:34
  Speaker 3: or Legal exchange show dot com. You can download the
• 10:37
  Speaker 3: guide right there again eight six six eight four eight
• 10:40
  Speaker 3: five six nine nine or Legal exchange show dot com
• 10:44
  Speaker 3: or and for more information, please go to our Instagram
• 10:47
  Speaker 3: page Cushing dolein PC.
• 10:50
  Speaker 2: Todd got another one for you here. Let's go to
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  Speaker 2: Stacy in Peabody. Stacy, what is your question for Todd?
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  Speaker 5: Maya? I have a question. So a parent died with
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  Speaker 5: some property and a life estate only gave it to
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  Speaker 5: one child, so that child wants to sell it but
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  Speaker 5: share the proceeds with their sibling.
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  Speaker 3: I don't know how nice is that?
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  Speaker 5: Yeah, so what are the consequences for like tax implications
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  Speaker 5: for maybe even gift taxes or capital gains?
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  Speaker 3: So great, great question. So let's explore this a little
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  Speaker 3: bit because I think it's good for everybody else as well, Stacey,
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  Speaker 3: to learn what was done here. So the parents actually
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  Speaker 3: were able to create this life estate arrangement where they
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  Speaker 3: took the property and they deeded it to child number one.
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  Speaker 3: And let's say there's three children, deeded it to child
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  Speaker 3: number one. That's how they created and they reserve the
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  Speaker 3: right to live there. Now we say there's a lot
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  Speaker 3: of negatives to this. Well, in this case, it you know,
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  Speaker 3: if five years had gone by, it actually protected it
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  Speaker 3: from the nursing home as you folks may or may
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  Speaker 3: not have found out if if your parent ever needed
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  Speaker 3: nursing home care. So that have been plus. It is
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  Speaker 3: now going to avoid probate, so you should be finding
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  Speaker 3: that out right now. So that's a plus on this side.
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  Speaker 3: And I think the last piece which goes to your point, Stacy,
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  Speaker 3: is it would have received a full step up in basis.
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  Speaker 3: So even though they gave away the property to one
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  Speaker 3: child and reserved the right to live there, now the
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  Speaker 3: full value of that property is includable in the estate
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  Speaker 3: for state tax purposes. And provided the value of that
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  Speaker 3: property plus the other assets that they might have doesn't
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  Speaker 3: exceed two million dollars, now there's no estate tax due,
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  Speaker 3: at least not in mass and the child in this case,
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  Speaker 3: child number one, received the property with a full step
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  Speaker 3: up in cost basis. And this is what goes to
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  Speaker 3: your point. Well, now the child wants to sell the property,
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  Speaker 3: so the child's automatically vested in one hundred percent of
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  Speaker 3: the property the moment parent died, that's another benefit of
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  Speaker 3: a life estate. But you're right to the exclusion of
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  Speaker 3: the other children. So not entirely sure why mom would
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  Speaker 3: have wanted to disinherit or dad would have wanted to
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  Speaker 3: disinherit the other kids. But in effect that's what was done.
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  Speaker 3: Nice part here, though, is we've got siblings who get
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  Speaker 3: along always, so nice to see that. So in this case,
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  Speaker 3: can the child sell the property, yes? Can the child
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  Speaker 3: then give money to her to the siblings? Yes? Again,
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  Speaker 3: So what's the ramifications? One child sells the property because
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  Speaker 3: of the full step up in basis zero capital gains tax,
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  Speaker 3: provided it's sold, you know, within nine months or a
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  Speaker 3: year from the date of death. There shouldn't be much
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  Speaker 3: growth from the time you die until the time it's sold.
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  Speaker 3: So now all the money is preserved. We don't have
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  Speaker 3: to deplete any of the money by paying taxes. Now
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  Speaker 3: what Now he's got all this money. Let's say it's
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  Speaker 3: a million dollars and we've got three kids, and we
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  Speaker 3: got to give you know, three hundred and thirty three
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  Speaker 3: thousand to the other two kids. Well, that's a six
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  Speaker 3: hundred and you know, sixty six thousand dollars gift that
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  Speaker 3: this one child needs to make to the other two kids.
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  Speaker 3: That is a taxable gift to who to the child
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  Speaker 3: making the gift because the parents didn't design this plan
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  Speaker 3: you know better to prevent this from happening. So yes,
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  Speaker 3: it's a taxable gift to the giver, not to you, Stacy,
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  Speaker 3: not to your siblings. You just simply get the dough
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  Speaker 3: tax free, income tax free, gift tax free. Now will
• 14:44
  Speaker 3: you will your sibling have to pay a gift tax? Well,
• 14:47
  Speaker 3: they'll have to file a gift tax return. But good
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  Speaker 3: news is they won't have to pay a gift tax.
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  Speaker 3: There is no gift tax in Master. There's a federal
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  Speaker 3: gift tax, but you have a fifteen million dollar gift
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  Speaker 3: tax exemption. But you we got a file and eat
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  Speaker 3: into that exemption a little bit to use up some
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  Speaker 3: of that exemption. So at least you can do it.
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  Speaker 3: And in this case, we're kind of dodging some bullets
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  Speaker 3: and we're not going to end up being out of
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  Speaker 3: pocket anything. But he is going to eat into his
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  Speaker 3: estate tax and gift tax exemption.
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  Speaker 2: So thank you, mister Lutsky, Thank you so much for
• 15:19
  Speaker 2: joining us today. We really appreciate it.
• 15:21
  Speaker 3: Always a pleasure. Thank you.
• 15:23
  Speaker 1: This has been Asked Odd on the Financial Exchange Radio network,
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  Speaker 1: Ask Todd with Todd. Lutsky has been presented by Cushing
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  Speaker 1: and Dolan, serving Massachusetts and New England for more than
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  Speaker 1: Cushing and Dolan Armstrong advisor. He does not provide any
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