Irrevocable Trusts in New York

What Is an Irrevocable Trust?

An irrevocable trust is a legal arrangement in which you — the grantor — transfer assets out of your personal ownership and into a trust that generally cannot be modified, amended, or revoked once it has been established. Unlike a revocable living trust, where you retain full control and can change the terms at any time, an irrevocable trust requires you to give up control over the transferred assets. A separate trustee manages those assets for the benefit of the named beneficiaries, according to the terms you set when the trust was created.

Why would anyone voluntarily give up control? Because the trade-off can be extraordinarily valuable. Assets placed in a properly structured irrevocable trust are removed from your taxable estate for New York and federal estate tax purposes. They are generally protected from your creditors. And after the applicable lookback period, they are sheltered from being counted as available resources if you ever need to apply for Medicaid long-term care benefits.

The distinction from a revocable trust is fundamental. With a revocable trust, you remain the legal owner of the assets for tax and creditor purposes because you can take them back at any time. With an irrevocable trust, the transfer is permanent — you no longer own the assets, and that separation is what creates the tax, asset protection, and Medicaid planning benefits. New York courts and the IRS both look at whether the grantor has retained any meaningful control; if so, the protective benefits can be lost.

New York law governs irrevocable trusts primarily through the Estates, Powers and Trusts Law (EPTL), and the specific rules vary depending on the type of irrevocable trust involved. Each type is designed for a particular planning objective, and choosing the wrong structure — or drafting it incorrectly — can result in a trust that fails to deliver the intended benefits.

Types of Irrevocable Trusts in New York

New York estate planning attorneys use a range of irrevocable trust structures, each designed for specific goals. Understanding the differences is essential to choosing the right approach.

Medicaid Asset Protection Trust (MAPT)

The most widely used irrevocable trust in New York elder law planning. A MAPT shields assets — typically a home and savings — from being counted toward Medicaid eligibility for nursing home care. The trust must be established at least five years before a Medicaid application to survive the lookback period. Covered in detail below.

Irrevocable Life Insurance Trust (ILIT)

Designed to hold life insurance policies outside your taxable estate so the death benefit is not subject to estate tax. For New Yorkers with large policies, an ILIT can save hundreds of thousands of dollars in combined state and federal estate taxes. Covered in detail below.

Grantor Retained Annuity Trust (GRAT)

A GRAT allows you to transfer appreciating assets — such as a business interest or investment portfolio — to the trust while retaining an annuity payment for a fixed term of years. If the assets appreciate faster than the IRS assumed interest rate (the Section 7520 rate), the excess growth passes to your beneficiaries gift-tax-free. GRATs are particularly effective in low-interest-rate environments and for assets expected to appreciate significantly.

Qualified Personal Residence Trust (QPRT)

A QPRT lets you transfer your home to an irrevocable trust while retaining the right to live in the property for a fixed term. At the end of the term, the home passes to your beneficiaries at a significantly reduced gift tax value. This structure works well for New Yorkers whose primary residence represents a large portion of their estate and who want to remove that value from estate tax calculations while continuing to live in the home.

Charitable Remainder Trust (CRT)

A CRT provides you or your beneficiaries with an income stream for a fixed term or for life, with the remainder passing to a charitable organization. The grantor receives a partial income tax charitable deduction at the time of the transfer, avoids capital gains tax on appreciated assets contributed to the trust, and removes the assets from the taxable estate. CRTs are often used by New Yorkers who hold highly appreciated stock or real estate and want to diversify without triggering a large capital gains bill.

Special Needs Trust (SNT)

A special needs trust — known in New York as a supplemental needs trust — is typically irrevocable and holds assets for the benefit of a person with a disability without disqualifying that person from Medicaid, SSI, or other government benefits. Third-party SNTs funded by family members are among the most common irrevocable trusts used in disability planning.

Medicaid Asset Protection Trusts

For many New York families, the most pressing reason to consider an irrevocable trust is Medicaid planning. The cost of nursing home care in New York is staggering — a semi-private room in Manhattan can exceed $15,000 per month, and even facilities in the outer boroughs and suburbs routinely charge $12,000 to $14,000 monthly. Without planning, a lifetime of savings can be consumed in a matter of years.

A Medicaid Asset Protection Trust is an irrevocable trust specifically designed to protect your assets while preserving your ability to qualify for Medicaid long-term care benefits. Here is how it works.

How a MAPT Works

You transfer assets — typically your home and non-retirement savings — into the trust. You name an independent trustee (not yourself) to manage the assets. You can name yourself as an income beneficiary, which means the trust can distribute income to you, but you give up access to the principal. The trust document includes provisions that comply with New York Social Services Law and the Medicaid rules administered by the New York State Department of Health.

The Five-Year Lookback Period

Medicaid imposes a five-year lookback period on asset transfers. If you transfer assets to a MAPT and then apply for Medicaid nursing home benefits within five years of the transfer, Medicaid will impose a penalty period during which you are ineligible for benefits. The penalty period is calculated based on the value of the transferred assets divided by the regional rate for nursing home care. This is why timing is critical — the earlier you establish and fund a MAPT, the sooner you clear the lookback window. For New Yorkers in their 60s and 70s, establishing a MAPT is one of the most important steps they can take to protect their family’s financial security.

What Assets to Transfer

The most common assets placed in a MAPT include the primary residence, bank accounts, brokerage accounts, and other non-retirement investments. Retirement accounts such as IRAs and 401(k)s are generally not transferred because the withdrawal triggers income tax and could create a penalty-period problem. The trust can also hold a life insurance policy with cash value. Vehicles, personal property, and modest checking accounts are sometimes retained outside the trust for daily use. The attorney structures the transfer to balance protection with the practical need to maintain access to funds for everyday living.

Irrevocable Life Insurance Trusts (ILITs)

Life insurance is one of the most commonly misunderstood assets in estate planning. Many New Yorkers assume that life insurance death benefits pass tax-free to their beneficiaries. And they do pass free of income tax. But the death benefit is included in the insured person’s taxable estate for estate tax purposes if the insured owned the policy or had any “incidents of ownership” at death. For a New Yorker with a $2 million life insurance policy and other assets that push the estate above the state exemption threshold, this can trigger a New York estate tax bill of $200,000 or more.

An Irrevocable Life Insurance Trust solves this problem by owning the policy instead of you. The ILIT is the applicant, owner, and beneficiary of the life insurance policy. Because you do not own the policy and have no incidents of ownership, the death benefit is excluded from your taxable estate entirely.

How an ILIT Works

You create the trust and name an independent trustee. The trust either purchases a new life insurance policy on your life or you transfer an existing policy to the trust (note: transferring an existing policy triggers a three-year lookback rule under IRC Section 2035 — if you die within three years of the transfer, the policy is pulled back into your estate). You make annual gifts to the trust, and the trustee uses those gifts to pay the premiums. Trust beneficiaries receive Crummey withdrawal notices, which convert the gifts into present-interest gifts eligible for the annual gift tax exclusion.

Tax Benefits

The death benefit proceeds are received by the trust free of both income tax and estate tax. The trustee then distributes the proceeds to your beneficiaries — typically your spouse and children — according to the trust terms. For a married couple with a combined estate near or above New York’s approximately $6.94 million exemption, an ILIT can preserve hundreds of thousands of dollars that would otherwise go to estate taxes. The trust can also be structured to provide for a surviving spouse during their lifetime, with the remaining assets passing to children upon the spouse’s death.

When to Use an Irrevocable Trust

An irrevocable trust is not the right tool for every situation. Giving up control of assets is a significant decision, and it should be made only when the benefits clearly outweigh the loss of flexibility. Here are the circumstances where an irrevocable trust is most valuable.

Medicaid Planning

If you are concerned about the cost of long-term care — nursing home, assisted living, or home care — a MAPT can protect your home and savings from being depleted by those costs. The earlier you plan, the better. Clients in their 60s who establish a MAPT have a comfortable five-year buffer before they are statistically likely to need long-term care. Waiting until a health crisis occurs is often too late.

Estate Tax Reduction

New York’s estate tax exemption is approximately $6.94 million, and the state imposes a “cliff” — if your taxable estate exceeds the exemption by more than 5%, the entire estate is taxed, not just the excess. This cliff can result in a tax bill of $400,000 or more on an estate worth $7.5 million. Irrevocable trusts — including ILITs, GRATs, and QPRTs — remove assets from the taxable estate and can bring you below the cliff threshold.

Asset Protection

Assets held in a properly structured irrevocable trust are generally beyond the reach of the grantor’s creditors, including judgment creditors, plaintiffs in lawsuits, and in many cases, divorcing spouses of beneficiaries. This protection is especially relevant for business owners, professionals in high-liability fields (physicians, real estate developers, contractors), and anyone who wants to shield family wealth from future claims.

Creditor Protection for Beneficiaries

An irrevocable trust can include spendthrift provisions that prevent beneficiaries’ creditors from reaching trust assets. Under New York EPTL Section 7-1.5, a spendthrift clause is enforceable and protects the beneficiary’s interest from attachment by their creditors (with narrow exceptions for support obligations and certain government claims). This is particularly important when leaving assets to a beneficiary who has creditor issues, is in a volatile profession, or is in an unstable marriage.

Frequently Asked Questions About Irrevocable Trusts in NYC