An irrevocable trust might seem like a complex topic to navigate, but when you’re enduring the loss of a loved one, or planning ahead for that time, you’ve got enough on your mind. 

We could probably write an entire book that sets the record straight about common misconceptions of irrevocable trusts (and hey, maybe we will someday…), but since April is tax season, we’re going to narrow our focus here on breaking down common questions about the tax implications of the most common kind of irrevocable trust, the “Medicaid trust”

Remind Me… What’s a Medicaid Trust?

First, let’s back it up a step. Simply put, an irrevocable Medicaid trust protects assets so they don’t have to “spend down” on long term care, and helps to manage estate planning. These assets can include a home, cash, life insurance or investments, businesses, and really any other valuable asset.

We fiid that people are often cautious to talk about irrevocable trusts because the word “irrevocable” sounds so… permanent. Many people think it means that once the trust is finalized, its contents are written in stone. However, what it actually means is that you can’t revoke the document itself, and in fact, you can change nearly anything about the trust that matters to you. 

No matter what stage of planning you’re currently in, gaining a better overall understanding of how families are impacted by these types of trusts can help to ease confusion about elder law issues like asset protection and estate planning. 

More importantly, it can bring relief for surviving family members. 

If you already have additional questions, don’t hesitate to reach out for a consultation.

4 Common Questions About Taxes for Irrevocable Trusts

1. Who pays income taxes on an irrevocable trust? 

The person setting up the trust continues to pay income taxes on the assets that the trust protects. If there is currently an income tax being paid, it will continue to need to be paid; you don’t even need a separate tax return to cover it. Your CPA can explain more, but when filing your taxes as usual, you’ll essentially just need an extra sheet of paper with a name, address, and a note referring to the trust.

2. If I use an irrevocable trust, can I keep my property tax exemptions?

Here in NYS, the answer is yes, if you own the property within the state. As long as the trust is set up right, it will allow full occupancy rights as a primary residence; you would still maintain the same property tax exemptions, including STAR, veterans exemptions, and the like. 

3. Does anyone have to pay a gift tax on an irrevocable trust?

The answer here is no—as long as the trust is done right. Because the trust keeps the home, investment accounts, or other assets within the family, the beneficiaries continue to maintain control of the assets. Therefore, it’s technically not considered a gift. 

4. What’s the best way to avoid tax traps on irrevocable trusts?

The best way? We highly recommend consulting with an experienced attorney to ensure you have an appropriately drafted trust—this is too important to DIY or to trust the same guy that did your nephew’s DWI case. For instance, if a parent wants to leave their estate to their kids, they might think it sounds easier to skip the legal considerations by gifting a house or an investment account without a trust. However, by doing so, they could be inadvertently setting up their family with a heavy tax burden.

An irrevocable trust, when drafted properly, ensures that assets are protected—and stay within the family—in a way that avoids legal missteps and minimizes tax implications. 

Let’s figure out the best way to set your family up for future planning. 

Schedule a call with us here.