Question:

I have a married couple who want an irrevocable trust as they are concerned with asset protection and long-term care. They are close enough to having a Massachusetts estate tax where it would be prudent to have some tax planning included. I have credit shelter provisions in a joint irrevocable trust for husband and wife.

However, they want to maintain control over some of their other assets like bank accounts. I was going to put these in an revocable trust. I’m trying to figure out if it is best to have an revocable trust for each spouse that just pours each spouse’s assets into the joint irrevocable trust at each spouse’s death. Or, should the revocable trust hold these assets separately and have their own credit shelter provisions? It seems like it could be administratively difficult to maintain two trusts like this when someone dies.

Response:

Since Massachusetts raised its estate tax threshold from $1 million to $2 million last year, it’s unusual for clients to combine estate tax and long-term care planning. This occurred more often when the threshold was $1 million since, with elevated house prices in Massachusetts, many homes by themselves were over this threshold.

Since now it only makes sense to do Massachusetts tax planning for estates over $2 million in value, most people who have taxable estates can afford to pay for their long-term care for a significant period of time. Except in rare cases, such as strokes or accidents, the need for the most expensive care does not occur suddenly. Instead, it’s a progression, so it’s possible to wait to do long-term care planning after an individual’s physical or cognitive status begins to decline. For these reasons, it’s now somewhat unusual for us to engage in both estate tax and long-term care planning for the same clients.

Nevertheless, we do so when one or both spouses already shows signs of decline or where the couple is house rich and cash poor. In some of these cases, protecting the home is sufficient for both tax and long-term care planning. We may transfer it into an irrevocable trust and leave the liquid assets free for the couple to use as they wish.

Or, we may take advantage of the protections Medicaid (MassHealth in Massachusetts) offers for testamentary trusts (trusts in wills). Since spouses usually are able to support one another while alive, long-term care costs for married couples generally are not so high. The funding of a testamentary trust upon the death of the first spouse to pass away can provide both tax and long-term care planning benefits for the surviving spouse who is more likely to need paid care.

Let’s take a look at two different scenarios. In both, the couple has $3 million in total assets. If they did no estate tax planning, there would be a Massachusetts estate tax of approximately $80,000 upon the death of the second spouse to pass away.  Typical credit shelter or QTIP trust planning can eliminate this tax. (The first question, of course, is how much trouble do they want to go to to save this much in taxes when they may spend down some of their funds on their care and living expenses, thus lowering the ultimate tax.) Let’s look at two scenarios:

Scenario A

House valued at $1 million, savings and investments totaling $2 million

We would probably do a standard estate tax plan for these clients, dividing their savings and investments between them and creating credit shelter or QTIP trusts. Given their ample liquid resources, it does not seem necessary to shelter any assets in an irrevocable trust before there are signs that either spouse may need care.

Scenario B

House valued at $2 million, savings and investments totaling $1 million

Here with a higher home value and less in savings, we may be a bit more inclined to engage in long-term care planning from the outset. The house might be transferred to an irrevocable trust that is designed to accomplish both long-term care and estate tax minimization goals. This will leave the couple with ample resources to pay for their needs, but protect their largest asset.

In both scenarios, other planning steps may be deemed appropriate when we have “facts on the ground,” in other words when we know that one or other of the spouses is likely to need care for an extended period.