Blogs from September, 2026

When clients first hear the words “irrevocable trust,” they often assume that transferring assets to the trust means giving up all of the tax benefits they enjoyed when they owned those assets individually.

That is not necessarily the case.

A properly drafted Medicaid Asset Protection Trust (MAPT) is a good example of why the word irrevocable does not tell the whole story. Although the trust is designed to restrict the grantor’s access to principal so that the assets can eventually be protected for Medicaid purposes, it can also be structured to preserve several important tax benefits.

In fact, a well-designed MAPT can look very different for Medicaid purposes, income tax purposes, and estate tax purposes.

1. The Trust Can Remain a “Grantor Trust” for Income Tax Purposes

Many people assume that once assets are transferred to an irrevocable trust, the trust becomes a separate taxpayer and must pay income taxes at the higher tax rates applicable to trusts.

A Medicaid Asset Protection Trust can generally be drafted as a grantor trust for income tax purposes.

When a trust is treated as a grantor trust, the IRS essentially looks through the trust and treats the grantor as the owner for income tax purposes. The trust's income, deductions, gains and losses are generally reported as belonging to the grantor rather than being taxed as income of a separate trust.

This can be particularly important because trust income tax brackets are highly compressed. A non-grantor irrevocable trust can reach the highest federal income tax bracket at a much lower level of income than an individual taxpayer.

Grantor trust status can also make tax reporting and management of the assets considerably more familiar to the person creating the trust.

In other words: the trust can be irrevocable for Medicaid planning purposes without necessarily becoming a separate taxpayer for income tax purposes.

2. Appreciated Assets Can Still Receive a Step-Up in Basis at Death

Another common concern is:

“If I put my house or investments into an irrevocable trust now, will my children lose the step-up in basis when I die?”

With a properly structured Medicaid Asset Protection Trust, the answer can be no.

Consider a simple example. Suppose a parent purchased a home many years ago for $200,000 and it is worth $1 million at the parent's death.

If the children simply received the parent's $200,000 basis, a later sale of the property could potentially result in approximately $800,000 of taxable capital gain.

However, if the trust has been properly structured so that the property is included in the grantor's gross estate for federal estate tax purposes, the property can generally qualify for an adjustment in basis at death under Internal Revenue Code §1014. The new basis would generally be the property's fair market value at the date of death.

If the property were worth $1 million when the parent died and the children later sold it for approximately $1 million, there may therefore be little or no capital gain attributable to the appreciation that occurred during the parent's lifetime.

This is an important distinction between a properly designed MAPT and certain other irrevocable gifting trusts.

Grantor trust status by itself does not create a step-up in basis. In fact, the IRS has specifically confirmed that an asset in a grantor trust that is not included in the grantor's gross estate does not receive a basis adjustment merely because the trust was a grantor trust for income tax purposes.

A Medicaid trust can instead be intentionally structured to preserve estate inclusion—and therefore the potential basis adjustment—while still accomplishing the desired Medicaid planning.

That distinction can have significant tax consequences for highly appreciated homes, brokerage accounts and other assets.

3. Real Estate Tax Benefits Can Often Be Preserved

For many clients, the most valuable asset being transferred to a Medicaid Asset Protection Trust is the family home. Understandably, they are often concerned that transferring title to a trust will cause them to lose valuable property-tax benefits.

Fortunately, New York law recognizes beneficial ownership under a trust for purposes of several real-property tax exemptions.

For example, New York expressly provides that when a homeowner transfers a residence to a trust but remains a beneficiary and continues to live in the home, the beneficiary may continue to be treated as the homeowner for purposes of the STAR benefit. The State's guidance specifically recognizes trust beneficiaries as owners for this purpose.

New York has similarly recognized trust-beneficiary eligibility in connection with certain senior citizen and veterans exemptions. Importantly, the State has stated that, for these purposes, the fact that a trust is irrevocable rather than revocable does not, by itself, eliminate eligibility.

Eligibility for any particular exemption still depends upon the applicable program, the terms of the trust, the homeowner's circumstances and local requirements. But transferring a residence into an irrevocable Medicaid trust does not automatically mean giving up the property's existing tax benefits.

“Irrevocable” Does Not Mean the Same Thing for Every Purpose

This is one of the most important concepts to understand about Medicaid Asset Protection Trusts.

An asset can be treated one way for Medicaid eligibility, another way for income tax purposes, and still another way for estate tax and basis purposes.

A properly drafted MAPT may therefore be designed so that:

• the grantor cannot simply take the principal back, which is fundamental to the Medicaid asset-protection strategy;
• the grantor continues to be treated as the owner for income tax purposes;
• appreciated assets remain includible in the grantor's estate so that they may qualify for a step-up in basis at death; and
• a residence transferred to the trust can continue to qualify for applicable real-property tax benefits when the statutory requirements are satisfied.

This is why it can be misleading to compare a Medicaid Asset Protection Trust to an irrevocable trust designed primarily to make completed gifts or remove appreciating assets from a taxable estate. They may both be called “irrevocable trusts,” but their tax objectives—and their tax consequences—can be very different.

The Drafting Matters

A Medicaid Asset Protection Trust is not simply an asset-protection document. The provisions included in the trust can affect income taxes, capital gains taxes, estate taxes, basis and real-property tax exemptions.

That is why Medicaid planning should not focus solely on getting assets “out of your name.” The goal should be to protect assets without unnecessarily sacrificing valuable tax benefits along the way.

When properly designed, a Medicaid Asset Protection Trust can accomplish both.

What movies and television get wrong about wills, trusts, probate—and what really happens after someone dies.

If your knowledge of estate planning comes from movies and television, you probably know exactly what happens after a wealthy relative dies.

The family gathers in a lawyer’s wood-paneled conference room. The lawyer opens an envelope and dramatically reads the will aloud. Someone gasps. Someone else discovers that they have been disinherited. A previously unknown heir appears. And before the closing credits, someone has inherited the mansion and everyone else is headed to court.

It makes for great television.

It just doesn’t look much like real life.

Here are nine estate planning myths Hollywood loves—and what actually happens.

Myth #1: Everyone Gathers for a Dramatic “Reading of the Will”

This may be Hollywood’s favorite estate planning scene, but formal will readings are largely a creation of movies and television.

There is generally no meeting where the attorney gathers the family together and dramatically announces who inherited what. Beneficiaries and other interested parties are typically notified through the probate process, while attorneys and executors generally communicate with family members individually by mail, email or telephone.

So, unfortunately, there is usually no dramatic moment when the lawyer announces:

“And to my nephew, who thought he was getting everything, I leave…nothing.”

Myth #2: Everyone Gets Their Inheritance Right Away

On television, the funeral takes place on Monday and someone seems to be living in the inherited mansion by Friday.

Real estates move much more slowly.

Before assets can be distributed, an executor may need to be formally appointed, assets must be identified and collected, debts and expenses addressed, tax issues resolved, property sold or transferred, and other administrative matters completed.

Even a relatively straightforward estate may take many months to administer. More complicated estates can take several years, particularly when there are tax issues, difficult-to-sell assets, disputes among beneficiaries or litigation.

Inheriting $5 million at the beginning of an episode does not necessarily mean you can spend it before the closing credits.

Myth #3: A Will Contest Is Solved in One Dramatic Courtroom Scene

Hollywood loves the surprise witness who walks into court with the document—or revelation—that solves everything.

Actual estate litigation rarely works that way.

Challenges involving undue influence, testamentary capacity, fraud or the validity of a will can involve document discovery, medical records, witness examinations, depositions, motion practice, negotiations and sometimes a trial.

And unlike television, there may not be one dramatic piece of evidence that neatly answers the question.

This is one reason careful estate planning matters. A well-designed plan, properly executed documents and a clear record of the client’s intentions can help reduce the likelihood of disputes later.

Myth #4: You Can Change Your Will Just by Telling Your Lawyer

A movie character calls his lawyer from the hospital:

“Take my son out of the will and leave everything to the housekeeper.”

Problem solved?

Not quite.

You can certainly ask your attorney to change your estate plan, but simply telling your lawyer what you want does not change your will.

In New York, a will  must satisfy specific legal requirements. Generally, the person making the will must sign or acknowledge the will, declare it to be his or her will, and have at least two witnesses attest to its execution.

The same problem arises when someone writes a change on an existing will, crosses out a beneficiary or leaves handwritten instructions in a desk drawer. Those actions generally do not accomplish what the person intended.

When it comes to estate planning, intent is important—but proper execution is essential.

Myth #5: Probate Means Constant Trips to Court

The word “probate” may conjure up images of lawyers standing before a judge arguing over an estate.

Most probate proceedings are considerably less exciting.

Probate is a court process, but in an uncontested estate, much of the work takes place through documents filed with the Surrogate’s Court. Lawyers may never need to appear before a judge at all.

If everyone who needs to participate cooperates and there are no objections, the proceeding can often move forward without courtroom drama.

If someone contests the will, refuses to cooperate, cannot be located or raises another legal issue, however, the process can become substantially more complicated.

Myth #6: The Executor Takes Control the Moment Someone Dies

Being named as executor in a will does not mean that person instantly has authority over the estate.

The will generally must first be admitted to probate, and the Surrogate’s Court issues Letters Testamentary, which give the executor authority to act on behalf of the estate.

Depending on the circumstances and the court involved, obtaining those Letters can take weeks or months—and significantly longer if there are problems with the will, missing heirs, objections or other complications.

Meanwhile, there may be bills to pay, property to maintain and assets requiring attention.

This is one reason revocable trusts can be useful in the right estate plan: assets properly titled in a trust generally do not have to wait for the appointment of an executor before the successor trustee can act.

Myth #7: Trust Funds Are Only for the Super-Rich

Movies tend to introduce trusts with sentences like:

“She turns 25 next week and finally gets access to her $50 million trust fund.”

That gives people a very distorted idea of what trusts actually do.

Trusts are not simply places where extremely wealthy families park money for their children.

Depending on the type of trust and the client’s circumstances, a trust can be used to avoid probate, provide management of assets during incapacity, protect an inheritance for young or financially inexperienced beneficiaries, plan for estate taxes, protect assets for a beneficiary with special needs, or address long-term-care planning.

You do not need a private jet or a family compound to have a reason for creating a trust.

Myth #8: You Can Make an Oral Will on Your Deathbed

The dying movie character gathers the family around the bed and announces:

“I leave everything to Sarah.”

Dramatic? Yes.

A valid New York will? Almost certainly not.

New York recognizes oral—or “nuncupative”—wills only in extremely limited circumstances, primarily involving certain members of the armed forces during specified wartime or armed-conflict circumstances and mariners while at sea.

For almost everyone else, saying what you want—even in front of your entire family—is not a substitute for properly executed estate planning documents.

Myth #9: You Can Just Sign a New Will at the Last Minute

Technically, being close to death does not prevent someone from signing a will.

But Hollywood tends to leave out some very important details.

The legal formalities still apply. In New York, a traditional written will generally requires two attesting witnesses and compliance with the other statutory execution requirements.

The person signing must also have sufficient testamentary capacity and be acting voluntarily.

And if a brand-new will suddenly appears shortly before death—particularly one that dramatically changes a longstanding estate plan—the circumstances may invite scrutiny and potentially a challenge after death.

So the lesson is not that a deathbed will can never be valid.

It is that the hospital room is a terrible place to start your estate planning.

One Thing Hollywood Sometimes Gets Right

Every once in a while, Hollywood gets something surprisingly close to reality.

In the 1999 movie The Bachelor, a grandfather leaves his grandson a sizable inheritance—but with a catch. The grandson has to satisfy certain conditions, including getting married by a specified deadline, in order to inherit.

As strange as that premise sounds, conditional inheritances are real.

A properly drafted estate plan can place conditions on an inheritance or hold assets in trust until certain circumstances occur. For example, a trust might delay a beneficiary’s unrestricted access to an inheritance until a certain age or include provisions relating to education or other milestones.

But there are limits. Conditions that violate the law or public policy may not be enforceable, and conditions involving marriage or divorce require particularly careful drafting.

More importantly, sometimes the better estate planning approach is not to threaten a beneficiary with “Do this or you get nothing,” but to create a trust flexible enough to protect and support that beneficiary over time.

The Biggest Thing Hollywood Gets Wrong?

Estate planning should not be dramatic.

In fact, avoiding drama is largely the point.

A thoughtful estate plan identifies who should receive your assets, who should be responsible for administering them, what protections your beneficiaries may need, and how your affairs should be handled if you become incapacitated or when you die.

The best estate plans do not produce a great final scene for a movie.

They produce something much more valuable: a clear roadmap for your family at a time when they need one most.

Your estate plan may never make it to the big screen—but it should give your family a clear script to follow. Contact us to make sure yours does.

* Thank you to our summer intern, Gabriella Sadaghati, for her contributions to this article!