Ask Todd: Revocable vs Irrevocable Trusts

This week on Ask Todd, Todd explains the differences between revocable and irrevocable trusts and why you need to know how each functions and what the tax implications are. Todd also takes calls from listeners about their individual estate planning needs.

Episode Transcript

(00:00):
This is Ask Todd on the FinancialExchange Radio network. If you have an
existing estate plan or in the marketfor one, Todd Lutsky is here to
answer your questions and help you planfor a later life. Ask Todd is
presented by Cushing and Dolan, servingMassachusetts and New England for more than thirty
five years, helping families with astate and tax planning, Medicaid planning,

(00:20):
and probate law. Visit Cushingdolan dotcom. Now here's Todd Lutsky. As
promised, we are now joined byTodd Lutsky from the law firm of Cushing
and Dolan. We call the segmentAsked Todd because we open up the phone
lines and you get to ask Toddyour questions about estate planning. The studio

(00:41):
number here is eight eight eight twozero five two two six three, So
get callin if you want to askTodd your question about your estate plan.
We usually only have the opportunity tospeak with two to three people at any
given show, so again that numberseight eight eight two zero five two two
six three. Get calling early tomake sure you get queued up and get
one of those spots. That phonenumber again is eight eight eight two zero

(01:06):
five two two six three. MisterLutsky, how are you today? I'm
never better in you? Uh good. I'm in the middle of an experiment
right now. You're experimenting. Iordered a chicken in an egg from Amazon.
Yeah, I'll let you know.Yeah, yeah, I'll let you
know. Let me know, Todd, I want to talk a little bit
about, uh, revocable trusts.I have a question for you on them,

(01:27):
and specifically it relates to the taxationof revocable trusts. Let's say that
someone goes and does trust planning andchooses to utilize revocable trusts. How does
that impact their tax situation on ayearly basis? And there are many differences
between these trusts, and there's manysimilarities, but let's talk this one is

(01:51):
just about the revocable correct. Soon the revocable trust, do we have
an income tax I believe is thequestion? And in come tax difference?
Yes. So when you put assetsin these trusts that could be owning something
like just so you understand why thisis even a question, You're going to
be funding this trust with something likean investment portfolio, bank accounts, maybe

(02:16):
a rental property, and so thoseassets that are now owned by the trust
are generating income, interest, dividends, capital gains, or rent, well,
that income needs to be income taxedto somebody. Well, if it's

(02:38):
owned by the trust, the questionis who's paying the tax. So when
you title assets to a revocable trust, those investment or bank accounts will be
have a tax ID number equal toyour Social Security number. So now that
you know it's in your social Securitynumber, you can ignore filing any income

(03:00):
tax returns for the trust and justkeep on filing your own income tax returns.
That being your ten forty and solong winded answer to say, there
is no change from an income taxperspective when you have a revocable trust.

(03:20):
What if you are utilizing an irrevocabletrust designed to protect assets from a nursing
home, how does that impact theincome tax situation? And that is critical
because there's many kinds of irrevocable trust, which is what Chuck's alluding to,
right, So you've got to checkthat kind of irrevocable trust you have,
and for income tax purposes, itmatters whether that trust is a grant or

(03:46):
irrevocable trust. What that means inEnglish is that you the creator are still
the owner for income tax purposes.So when you set up an irrevocable we'll
use Medicaid trust as you mentioned,Chuck, and you put in those brokerage
accounts or that rental property. Thebrokerage account now will have an ID number

(04:06):
given to it because the trust willhave its own ID number. So once
the trust gets its own ID number, the irs will be looking for a
tax return for that ID number.However, if it's a grand tour trust
and this trust earns interest, dividendsand gains, whether it's distributed out or

(04:29):
not, because it's a grand toor trust, and you're treated as the
owner for income tax purposes, itwill get picked up on your own personal
ten forty. So in English,yes, there's a little difference. You
have to file an extra return forthe trust. It's called a trust return,
but it pays zero tax and everythingflows through to your personal return.

(04:55):
Talking with Todd Wotski from the lawfirm of Cushing and Dolan, we call
the segment Asked Talk because it's yourchance to ask Todd your questions. Still
have room for another person or twoon the phone lines. That number is
eight hundred. I'm sorry eight eighteight to zero five two two six three.
That's the number to call to askTodd a question live on air.
We're gonna take a quick break,but when we come back, it's right

(05:15):
to your phone calls. That studionumber again is eight eight eight to zero
five two two sixty three. Quickbreak, right to your phone calls when
we return. Ask Todd with ToddLutsky every Wednesday at ten thirty only here
on the Financial Exchange Radio Network.You're listening to Ask Todd with Todd Lutsky

(05:38):
on the Financial Exchange Radio Network.All right, it's time to get right
to your calls with Todd Lutsky.First up, we've got Tom on the
Cape. Tom, what's your questionfor Todd? Good morning, gentlemen,
how are you great? It's inregards to my aging mother, who's now

(06:00):
an assisted living. She had giftedus the maximum or whatever the I think
it's eighteen thousand five, whatever itis the state of Massachusetts. Does that
look back pertain to a gift alsoor is it sticarly just for her assets?
Yeah? So, great question.It's confusing for folks. This is
when you're thinking about protecting assets froma nursing home. Right. First of

(06:24):
all, assisted living is going tobe private pace. She would need to
you know, decline and need furtherhelp to be in a nursing home in
order to get eligible for Medicaid.But a look back is a five year
look back for and I'll just giveyou the definition. Any time a person
takes any asset and that was aformally available to the nursing home and puts

(06:47):
it somewhere where it's no longer available, you create a five year waiting period
forget the amount for the moment.So this eighteen thousand dollars number you're discussing
is confusing for people because for gifttax purposes, you're right, it's a
freebie. You don't need to filea seven h nine gift tax return,

(07:11):
and you don't need to pay anygift tax, and you don't need to
report it anywhere. It's eighteen thousandper year per person. That's for IRS
gift tax purposes. For Medicaid eligibilitypurposes, completely different rules. Every penny
you give away creates this five yearwaiting period, So that eighteen is still
going to create a five year waitingperiod for each person that they gave it

(07:33):
to. So hope that helps alittle, But you know, these are
the kind of things that are confusingto people, and maybe the better approach
for Tom's mother at this point,again, she's still an assisted living and
maybe has an opportunity to do someplanning figure out whether a revocable or irrevocable
trust is right for you. That'swhat this guy does. It's new for

(07:54):
the month. It helps you ifyou haven't done your planning, learn what
the differences are between the two.And if you have done your planning,
maybe you want to switch. Buthere, more importantly, it talks not
only about the income tax gift differences, which is what Chuck asked me about
earlier, but are there gift taxdifferences? What about the estate taxes?
Do they do the same thing?And more importantly than all that, how

(08:16):
does it work day today? Whatcan I do with assets in there?
What can I not do anymore withassets in there? It really will clear
up one of the most frequently askedquestions there is call and get the guide
differences between revocable and irrevocable trusts eightsix six eight four eight five six nine

(08:37):
nine or Legal Exchange show dot Comone more time eight six six eight,
four, eight, five, six, nine nine or Legal Exchange show dot
com. Todd, I got anotherone here for you. We've got Laurie
in New Hampshire. Laurie, youare on with Todd Lutsky. All right,
thank you, Hi Todd. Ijust have a question. My husband

(08:58):
and I are in our young fifties, fifty two fifty three. We have
a lot of money set aside forretirement, probably close to a million.
We have a lot in our checkingand statings account. I don't know if

(09:18):
we should put everything in a trust. We have property probably twenty seven acres,
so I don't know this is somethingthat we should look at to put
in the trust. Do you havekids? Yes, we have three kids,
and we do have a will andit's set up that it'll be whatever

(09:41):
happens to us. Are you areyou rather than that? Are you are
the kids? Miners twenty two,nineteen and fifteen, so one minor,
so that's important. So yeah,just listening to what you're saying. You
have the will, which is basicallynot an overall estate plan. Some people
think it is, but it's reallyand so for someone in your case,

(10:01):
Yeah, mid fifties, early fifties. Are you looking like you say you
got a million in retirement, youprobably have who knows how much more in
bank accounts. You got twenty sevenacres a house. You know, you
start adding up all that stuff,life insurance, you're probably well north of
two million in total value of yourestate. Would that be fair to say?
I think so, yes, yeah, And so you need to start

(10:24):
thinking about estate taxes. One,because you've now exceeded your estate tax exemption
threshold in Massachusetts. So that's twomillion. But by doing basic trust planning,
we can eliminate that up to fourmillion. We can double that.
So if you're under four million,with a basic trust, we can eliminate
taxes number one. Number two,we can avoid probate so your children don't

(10:46):
have to go through all that nightmare. We keep you in charge of everything,
because I think a revocable trust isprobably in order for someone in your
situation, your age group. Imean, I don't think we're worried about
nursing homes quite yet. And theother big thing to think about is you
still have a minor child who can'town anything. So if you happen to
die before that child reaches majority,you know they can't own real estate.

(11:09):
They can't own investments, so youwant to put it in a trust for
them. And so this and evenyour other kids, with your size of
your estate, you might not wantto just leave things outright to them.
Yet you might want to control itfor how they get it and when they
get it through a trust. SoI think you are in absolute right order
to do a plan of some kind, probably a revocable trust plan, a

(11:33):
joint revocable trust for work. Andyou know what, That's exactly what this
guide's about, folks. It's aboutrevocable versus irrevocable to help you decide which
way is right for you. Sohopefully that helped you out. Tod,
I've got one more for you here. We got a couple minutes left.
Let's go to Mark Infoalmouth Mark.What's your question for Todd? Hello Todd?

(11:56):
Yes, Hi, Todd. I'vegot properties. Both of them are
irrevocable trust, both of them passedby the year lookback period. Okay,
getting ready to retire. We wantto sell the primary residence and tear down
the second cottage and rebuild it.So my question is, is we have
money outside the trust that I'm goingto put into the cottage to rebuild it.

(12:18):
Well, that putting that new moneyinto rebuild the cottage, will that's
start my five year look back onthat by by introducing those funds. So
so the answer, the quick answeris yes, if you take money that's
not in an eravocable trust now andput it in an irrevocable trust, you
will create a new five year waitingperiod, but only for the new money.

(12:45):
Okay, so it's not going tostart a new five year waiting period
for the two properties that are alreadyin there. Now, what I might
suggest, and again so that that'sreally good news at the end of the
day. If there's no other moneyin the trust, what i'm it might
suggest, and what I heard yousay is I might be selling the primary
residence that's in there. And ifyou sell it, the trust can in

(13:09):
fact sell it. It should provideno adverse income tax consequence to you,
meaning you'll still get your capital gainsexclusion, but more importantly, you'll now
have money in the trust, andthe selling it is not going to start
a new five year waiting period onthat asset. So, now you have
money in the trust, maybe usethat money to fix up the property that

(13:33):
you were talking about putting money inthe trust to use to fix up.
If you can swing it that wayand do it that way, then you
don't reset the clock at all.That said, if you have extra money
outside the trust that you would liketo protect anyway, and you're not really
old yet, then maybe you putmore money in and get your five year

(13:54):
clock started. So now you've protectedthe two properties and even some extra money
along the way. But those arethe kind of things that you need to
think about when you have it.But I hope you even everybody listening heard
how flexible and irrevocable trust can bejust from this question, mister Watsky,
thank you so much for joining ustoday. Always pleasure. Thank you.

(14:16):
This has been Asked Odd on theFinancial Exchange Radio network. Ask Todd with
Todd. Lutsky has been presented byCushing and Dolan, serving Massachusetts and New
England for more than thirty years,helping families with the state and tax planning,
Medicaid planning, and probate law.Call eight hundred and three nine three
four thousand and one or visit CushingDoolan dot com. The views expressed in
this segment are solely those of Cushingand Dolan Armstrong advisor. He does not

(14:39):
provide any legal or tax advice.Please consult with your legal or tax advisor
on such matters. Cushing and Armstrongdo not endorse each other and are not
affiliated. Revocable and irrevocable trusts arecommonly used to protect your assets, but
there are significant differences between the two. Don't take chances securing your future.
Call Cushing and Dolan right now ateight six six eight four, eight five
six niney nine and get their andnew guide called the Differences between Revocable and

(15:01):
Irrevocable Trusts. Cushing and Dolman areexperts in elder life planning, and they
can answer critical questions that you mayhave as you determine which trust may be
best for you and your family.The guide contains crucial information about a variety
of topics, including the income taxeffects of both trusts, ways to leave
assets to your children, as wellas many other factors you should consider in
the estate planning process, such asyour net worth, your age, and

(15:24):
your marital status. Caught today eightsix six eight four eight five six ninet
nine. That's eight sixty six eightfour eight five six nine nine or request
the guide online from their website Legalexchange show dot com