Many people have some misconceptions about trusts. One of them is the idea that a trust is a singular option, and you transfer assets out of your name when you establish a trust.
The first thing to understand is the fact that there are multiple different types of trusts. It is true that you do convey assets into all trusts, but you do not necessarily lose control of the resources.
Revocable Living Trust
One very commonly used trust is the revocable living trust. As the name would indicate, you retain the right of revocation if you create this type of trust. You can dissolve the trust at any time and reassume direct personal control of the assets that you conveyed into it.
This is not the only level of control that you have over the trust’s resources. While you are living, you will act as the trustee, so you have access to the assets at all times. You can do anything that you want to with the property that is held by the trust.
Because you still have total access to the assets, you are retaining incidents of ownership in a legal sense. If you are sued for any reason, the assets would not be protected.
There is a federal estate tax in the United States that is a factor for high-net-worth individuals. Assets in a revocable living trust would be part of your estate for tax purposes.
Why do people use these trusts if they serve no purpose? A living trust may not provide asset protection, but there are other benefits that are quite valuable to some people.
If you use a will to transfer assets, it would be admitted to probate. The inheritors would receive nothing while the estate is being probated by the court, and it is a time-consuming process.
Probate is costly and interested parties can access the records to find out how the estate was distributed. If you use a living trust as your asset transfer vehicle, the trustee would distribute assets to the beneficiaries in accordance with your wishes outside of probate.
Another benefit is the ability to dictate the terms of the distributions. You can have the trust remain active over months or years to maximize the earning potential and limit spending.
Plus, you could include a spendthrift clause and the trust would become irrevocable after your passing. The beneficiaries would not have direct access to the principal, and this would also apply to their creditors.
There are also irrevocable trusts, and you surrender incidents of ownership when you create this type of trust. Generally speaking, you cannot revoke the trust. Under most circumstances, the terms of the trust cannot be changed, but there are some exceptions to the rule.
When it comes to personal asset protection, you can potentially establish a self-settled asset protection trust in Ohio. You would not be able to directly access assets that you conveyed into it, but you could receive distributions at the trustee’s discretion.
This type of trust can protect assets from future creditors, but you cannot create the trust as a response to impending legal difficulties.
Another trust that provides a different types of asset protection is the income only Medicaid trust. Many seniors seek Medicaid eligibility late in their lives because they anticipate the need for long-term care, and Medicare will not cover custodial care.
Medicaid program coverage does extend to the custodial care that you would receive in a nursing home, and there is a Medicaid waiver that will pay for in-home care. Since this is a need-based program, you cannot qualify if you have more than $2000 in countable assets.
There is a five-year look back period, so you have to act well before you actually need long-term care. From a financial perspective, you can continue to accept distributions of the trust’s earnings after it has been funded, but you would lose control of the principal.
If you apply for Medicaid at least five years after you convey resources into the trust, the principal would not count. These are a couple of the reasons why someone may use an irrevocable trust, but there are others.
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As you can see, there are different tools in the estate planning toolkit, and you should make fully informed decisions. We can gain understanding of your objectives, explain your options, and help you devise a plan that is tailor-made to suit you and your family.
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