There is a widely held misconception about the way that trusts are used in the field of estate planning. You may assume that a last will is the core asset transfer vehicle that is appropriate for just about everyone. The idea is that trusts are only useful for very wealthy people with complicated portfolios.
In actuality, there are many different types of trust, and they satisfy varying aims. Yes, some of them are used by people with a great deal of money that are exposed to the federal estate tax. However, other trusts are actually more widely utilized, and you should understand the facts before you make any assumptions.
Revocable Living Trusts
A revocable living trust is a legal device that is the ideal choice for a broad range of people. First, it is important to take note of the “revocable” designation. You can revoke or dissolve a living trust at any time, for any reason. As the grantor of this type of trust, you can act as the trustee and the beneficiary while you are living, so you maintain total control on every level.
In the trust declaration, you would name a successor trustee and successor beneficiaries. After you are gone, the trustee would follow your instructions and distribute assets to the beneficiaries in accordance with your wishes.
The probate court would not be involved, and this is a major advantage over a last will. Probate is a costly and time-consuming legal process. In addition to the benefit of probate avoidance, you can include spendthrift protections, and the estate administration tasks are streamlined when you use a living trust.
Medicaid Trusts
When you are planning ahead for your elder years with your legacy in mind, you should consider the potential impact of long-term care costs. The majority of senior citizens will need living assistance eventually, and over 30 percent of them will require nursing home care.
These facilities are exorbitantly expensive, and Medicare will not pick up the tab. Medicaid does pay for living assistance, but it is a need-based program, so you cannot qualify if you have significant assets in your own name.
To account for this, you could convey resources into an irrevocable Medicaid trust. As the name would indicate, you would not be able to revoke the trust, and you would have no access to the principal. That’s the bad news, but the good news is that you would be able to receive income that is generated by assets in the trust until and unless you apply for Medicaid.
Supplemental Needs Trusts
If you have a loved one with special needs on your inheritance list, you have to take pause and consider the potential impact on government benefit eligibility. Many people with special needs rely on Medicaid for health insurance, and Supplemental Security Income (SSI) is a source of ongoing income.
Since these programs are only available to individuals with financial need, a sudden infusion of financial resources can trigger a loss of eligibility. As a response, you could convey assets into a supplemental needs trust. The person that you want to provide for would be the beneficiary, and you would name a trustee to administer the trust.
Medicaid and SSI will provide the basics, but there are other needs and desires that these programs will not cover. The trustee of a supplemental needs trust can use assets in the trust to satisfy these needs without impacting ongoing government benefit eligibility.
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- Creating a Trust: What to Consider - March 23, 2023
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