Irrevocable Trusts in Minnesota
Irrevocable trusts are private legal agreements that limit an individual’s ability to withdraw funds or assets placed within the trust. Unlike revocable trusts, once you have transferred assets into an irrevocable trust you cannot make changes to the trust without a court order; these trusts cannot be altered or terminated. These trusts are used in estate planning for a number of reasons, but one of the most common involves reducing a person’s estate tax liability.
In basic terms, the estate tax is imposed on your assets after your death if the net value is more than a certain amount, $5,490,000 as of 2017 and $5,340,000 (indexed for inflation) for 2018 and beyond under current law . This means that if your assets exceed the amount set by the federal government at the time of your death, you may be required to pay estate taxes out of your estate. Estate taxes can result in your heirs receiving significantly less than expected or maybe inheriting nothing at all.
One way to avoid this situation is to set up an irrevocable trust to house assets you wish to pass to your loved ones after your death. Because these trusts are not considered the property of the person who created them, they are no longer included in their total estate value. However, in the wrong situation, setting up an irrevocable trust can do more harm than good.
Prospective Benefits of an Irrevocable Trust
Minnesota law allows people to set up an irrevocable trust during their lifetime in order to better protect their assets for the future. There is a great deal of flexibility allowed under Minnesota law, and the specific terms that apply to irrevocable trusts are customized based on individual needs and goals.
Asset Protection
One major reason to create an irrevocable trust is to increase protection for assets. Certain assets held in a trust will be beyond the reach of creditors. An irrevocable trust is also protected from state estate taxes, as well as Medicaid and probate estate recovery. For example, many people use an irrevocable trust to transfer ownership of their home. When the homeowner dies, the home is not subject to estate recovery. The assets in the trust are not available to satisfy debts of the estate.
Estate Taxes
Minnesota enacted a statewide estate tax in 2013. A married couple can leave $2.1 million to heirs tax-free in 2019, but the threshold gradually decreases through 2023. In 2024 and later years, any estate larger than $1.8 million will be subject to the tax. Individuals may want to consider creating an irrevocable trust to ensure their estate is not subject to the Minnesota estate tax. An irrevocable trust can be set up in several different ways so that the grantor/creator retains the right to receive income generated by the trust assets, but does not retain the right to decide who gets the assets or control when they are distributed. When the assets are distributed at the proper time after the death of the creator, there will not be estate tax imposed. The assets are subject to Minnesota capital gains tax if the trust sells an asset with appreciated value.
Medicaid Planning
Irrevocable trusts can also be created to shield assets for Medicaid planning purposes. Medicaid eligibility is based on having limited income and assets, so the use of an irrevocable trust can shelter assets from the Medicaid eligibility determination. Generally, in order to qualify for Medicaid, a person must have less than $3,000 of countable resources. A home and limited amounts in a retirement account, life insurance, burial account, and IRA may not disqualify a person from qualification. The monthly income limit is counted as well. In 2019, the limit for an individual is $770.
Planning for long-term care is important because the costs of nursing-home care often exceed personal income and wealth. If a person has substantial wealth, he or she must find ways to shelter a portion of the assets. If they do not, transfer all assets before applying for Medicaid, or prevail in efforts to wait this period out, the person may become impoverished. One of the most important things to know about Medicaid planning is that the rules governing it will change from time to time.
Legal Guidelines for Creating an Irrevocable Trust
The legal requirements for setting up an irrevocable trust in Minnesota are similar to those of a revocable trust. The grantor still plays a critical role in the initial establishment of the trust, although in an irrevocable context, he or she no longer maintains an ownership interest in the property transferred to the trust. In other words, you can’t be the trustee or maintain control of the assets in an irrevocable trust. This is an important distinction to note, as many people are tempted to not have an attorney prepare their irrevocable trusts. The whole point of an irrevocable trust is to put assets beyond the reach of the grantor and the IRS, so that they are protected from creditors, divorce settlements and estate taxes.
As such, any potential trust fund that operates in an irrevocable context must have both a grantor and a trustee unrelated to the grantor. The terms of a Minnesota irrevocable trust also require it to name a beneficiary, including a provision that states what should happen to its contents should that beneficiary predecease the grantor, as well as a clause explaining the consequences that result in the event the named beneficiary declines the inheritance. Finally, for a Minnesota irrevocable trust to be valid, it must be signed by both the grantor and a witness, who is not a beneficiary to the expressed trust.
Rules and Restrictions
Certain important limitations exist regarding irrevocable trusts that may not be very well understood by some. For example, it is generally understood that once trusts are set up in Minnesota, that the specific provisions may not be changed and that the terms of the trusts may not be modified. While a trust may not be amended, a trust can be terminated if all of the current beneficiaries of the trust consent to termination. Also, the terms of the trust can have express provisions for modification or termination. To terminate a trust, the beneficiaries must also satisfy the requirements detailed in Minnesota’s general trust law codified under Minn. Stat. § 501B.16 which includes: (1) providing a statement of the reason for the proposed termination; (2) whether the reason for termination will continue to be satisfied after the termination if such is the case; (3) whether the assets of the trust are to be paid to the settlor; (4) an estimate as to the approximate value of the trust; (5) a schedule of what will happen if the trust is not modified or terminated; and (6) a valuation of real estate and liabilities (if applicable) recorded with the County Registrar of Titles. The statute allows the Court to terminate a trust if the Court considers the required information and determines the termination of the trust is feasible and that there will be no negative tax consequences in that regard. Another important consideration in Minnesota involves the procedures that are necessary to terminate a trust. Accordingly, the party seeking to terminate a trust is best advised to research detailed procedure that is intended by the statute to implement such trust terminations. Therefore, while it is possible to terminate a trust, the key consideration is that careful planning should be conducted before implementing an irrevocable trust.
Common Purposes of Irrevocable Trusts
Minnesotans often consider irrevocable trusts in a variety of situations:
As part of an estate plan. An irrevocable trust can be used to shift assets out of an estate for purposes of estate tax planning. (In 2006, the estate tax exemption was $2 million, and the top marginal estate tax rate was 46%.) These trusts can also provide a means of accessing assets while maintaining beneficial ownership over them during the grantor’s life without adverse estate and gift tax consequences.
To gift assets. If you want to give $50,000 to a grandchild, you could include that amount in your estate, or you could make the gift during your lifetime. If you make the gift during your lifetime, however, you would be required to file a gift tax return. (We are not going to address the gift tax consequences of trust distributions in this summary; see BLOOM’S TAX GUIDE.)
To preserve assets from creditors . When money is left in a trust for the benefit of someone else, creditors may have a difficult time accessing those funds. If the grantor and the beneficiary are not the same individual, the grantor’s creditors would not normally have any recourse against the trust. The same can often be said for the beneficiary’s creditors.
To avoid probate. If your estate consists of assets in your name alone, including those that pass outside of probate, a Minnesota Will may be sufficient. However, if your estate consists of assets in any other form, those assets may be subject to Minnesota’s other probate process, called "ancillary probate." You can avoid both types of probate by using an irrevocable trust to hold your assets.
To protect property from probate. Alternatively, if you want to have access to your assets during your life, you could transfer title to your Minnesota real estate to an irrevocable trust for your benefit. Your beneficiaries could then avoid ancillary probate.
New Developments in Minnesota Trusts Law
In June 2016, the Minnesota House and Senate passed legislation amending Minnesota Statutes section 501C.0707 to remove the prohibition on self-settled trusts. Minnesota Governor Mark Dayton signed this legislation into law during the course of the 2016 Regular Session. The new law generally takes effect August 1, 2016, and applies to the extent that the trust is revocable. It also applies to irrevocable trusts created on or after August 1, 2016.
Unless Minnesota’s prior revision statute applied, irrevocable trusts with a settlor residing in Minnesota prior to August 1, 2016 could very well have remained subject to the common law rules regarding settlor rights to revoke and terminate. This prior statute provided essentially that a trust was irrevocable unless the settlor expressly retained the right to revoke and specifically limited the events that would extinguish the right. Under the Minnesota Uniform Trust Code ("MUTC"), however, any powers to revoke or amend an irrevocable trust must be set out in the terms of the trust, otherwise the common law rules apply. Thus, prior to the revision of section 501C.0707, trusts that had provided that they could only be revoked by the settlor as set out in the terms of the trust would still allow for the prior common law rule to apply. In this way, if the settlor reserved the right to revoke and specified the manners in which the trust could not be revoked (such as a change of heart), the trust could have been deemed revocable.
This legislation clarifies that a trust that has been created in such a manner is irrevocable. By amending the terms of the statute to reflect the presumptions under the MUTC, the Minnesota Legislature has further conformed Minnesota law to the MUTC in a way that should result in better predictability regarding the various rights of the settlor of an irrevocable trust.
How to Find a Qualified Minnesota Trust Attorney
Selecting the right trusts and estates attorney is a crucial step in planning your estate. Unfortunately, many people make the mistake of thinking that any old lawyer – no matter how inexperienced – can draft a trust for them. Often this leads to unexpected results or, in some cases, disaster for your family.
Here are a few tips on how to choose a trust attorney in Minnesota:
Look for experience
Find someone who has experience with Minnesota irrevocable trusts and ask them to refer you to someone they trust (pun intended). You will need someone who has years of experience doing this type of work professionally.
Look for specialization
Look for someone who specializes in trust and estates law, as opposed to someone who juggles multiple different practice areas (which could make a trust just one of many things they handle). You need someone who is experienced, specifically in irrevocable trusts, and that they handle these types of cases regularly.
Read the reviews
Although it’s not always easy to get client reviews and testimonials from lawyers and law firms, it is well worth the effort. Many law firms will have client reviews on their website for all sorts of reasons. Plus, you can check AVVO (a trusted online lawyer directory with reviews) to read and leave reviews about your lawyer.
Frequently Asked Questions Regarding Irrevocable Trusts
What is the purpose of an irrevocable trust?
People create irrevocable trusts to protect assets, reduce estate taxes and avoid creditors. These trusts can manage their assets and help with Medicaid eligibility for long-term care benefits.
In an irrevocable trust, assets are removed from a person’s ownership and transferred to the trust. The grantor of the trust relinquishes his or her right to control the property, ensuring that the assets are used for the intended purpose.
An irrevocable trust is generally best for people who want to avoid estate taxes, keep assets protected from creditors or qualify for Medicaid while preserving assets for heirs.
What is the difference between a revocable and an irrevocable trust?
A revocable trust allows the grantor to retain control over the assets and make changes to the terms, including the power to dissolve the trust. By contrast, an irrevocable trust relinquishes control over the assets and once it is created, it cannot be undone. The only person who can change the terms of a trust is the grantor, and doing so can result in a loss of control over the assets placed in the trust.
Can I undo or amend an irrevocable trust?
Once established, an irrevocable trust cannot be altered, unless all of the beneficiaries who would be affected agree to the requested changes . State laws and the specific terms of the trust define how the change needs to be implemented, as well as the extent to which the grantor can get involved to revive his or her control of the assets. Judicial approval may be needed to amend an irrevocable trust.
Who can manage the trust?
State laws dictate who can be a trustee of the trust. Often, a bank or trust company can handle management of the trust. In many cases, people also name a successor trustee, so if the current trustee cannot serve, due to incapacitation or death, the successor can step in and continue to serve as the trustee.
Does an irrevocable trust shield my assets from lawsuits or creditors?
Assets placed in an irrevocable trust are protected from creditors, as long as the intent is not to harm creditors or engage in fraudulent transfers. Likewise, estate planning attorneys use irrevocable trusts to shield assets from Medicaid Estate Recovery.
Are irrevocable trust assets taxable?
Assets held in an irrevocable trust aren’t subject to estate taxes, but the IRS still considers income generated by these assets as taxable income. The grantor can place the income generated in a separate irrevocable trust for the benefit of someone else, which in turn will help the grantor qualify for Medicaid.