2010-12-03 / Columnists

Spotlight On Elderlaw

Planning With Irrevocable Trusts
Commentary By Nancy J. Brady, RN, Esq. And Linda Faith Marshak, Esq.

A large part of our Estate Planning and Elderlaw practice involves the use of Trusts to protect our clients’ assets from the costs and delays of probate, or in the event of long term illness.

Many of our clients choose to transfer the title of their real property to an Irrevocable Trust because of the many benefits achieved in such planning. As you might be aware, Medicare and supplemental health insurance will pay for only limited home care or nursing home care. Long term care insurance, or if financially eligible, Medicaid, are the only means to finance long term care. To be financially eligible for Medicaid for long term nursing home care, it is possible to protect most or all of the value of your assets only if planning is done in advance. Unless our clients fall under the few exceptions to the Medicaid eligibility rules, we recommend and create these types of trusts for many of our clients well in advance of any possibility of requiring long term nursing home care.

An Irrevocable Living Trust is created by a written agreement between you (known as the Grantor) and the person you choose to manage the assets in the Trust (known as the Trustee). The terms of the Trust Agreement should be tailored to meet the Grantor’s specific needs and objectives especially with regard to beneficiary designations. One of the greatest advantages of the irrevocable trust is that upon the Grantor’s death, remaining trust assets will be distributed directly to named beneficiaries without the costs, problems, publicity, or delays of Probate. The Grantor can also direct that upon death the Grantor’s assets be left in further trust for some or all of your designated beneficiaries, such as a trust for minors, or disabled individuals. The assets in the Trust are governed by the written Trust document signed by the Grantor and the Trustee. The language of the Trust Agreement is critical in order to protect assets in the event of a catastrophic illness. The state and federal Medicaid laws have stringent requirements pertaining to Trusts. Assets in Trusts failing to meet these regulatory standards will become vulnerable in determining Medicaid eligibility.

Advantages of an Irrevocable Trust

A Trust can serve a multitude of purposes depending on your desired objectives, such as:

1. Asset protection for the Healthy Spouse and Family Members.

A Revocable Trust will serve to avoid probate, however does not protect your assets in the event of a catastrophic illness. Since you can revoke the trust, Medicaid can force you to revoke the Trust and withdraw all the Trust assets and use those assets towards the cost of care. The only type of Trust that will truly protect resources (both liquid assets and avoid real property liens) in the event of a catastrophic illness is an Irrevocable Trust where the language of the Trust Agreement appropriately complies with the federal and state Medicaid requirements, and preserves your hard earned assets for your family.

2. Avoiding Probate.

Probate is a court proceeding required when a person passes with assets titled in his name alone, with no joint owner or beneficiary designation. If property is owned in more than one state, separate proceedings are required in each state. A trust can avoid probate, but if your objective is not to protect your life savings with the Trust, but rather it is only to avoid probate or minimize estate taxes, then a Revocable Trust might be more suitable, and, in planning to finance long term care, the purchase of a long term care insurance policy should also be considered.

3. Avoids risks of placing assets in children’s names.

When assets are transferred directly to children, the children become the owners of those assets. Most of the risks and disadvantages involved in transferring assets directly to children can be avoided with a properly written Trust Agreement. For example, a well written Trust:

Will not result in income tax consequences for Beneficiaries; will not cause financial aid problems for tuition for Beneficiaries; will not cause trust assets to be vulnerable if a Beneficiary is sued, involved in a divorce, or has other personal problems (outright transfers to persons other than spouse would result in jeopardy of the Grantor’s assets).

4. Irrevocable Trusts Provide for Asset Management in the Event of Incapacity. If you establish your own Irrevocable Trust and later become incapacitated, your designated Trustee has the authority to manage your assets in the trust with virtually no difficulties. This allows for your state planning investments to remain intact, and your wishes to be honored.

5. Supplemental Needs Trust Can Be Part of Beneficiary Clause

A Supplemental Needs Trust is a trust which provides for a disabled person. Under this type of trust, the disabled person would receive distributions to supplement any benefits he/she was receiving from governmental programs. The disabled person would not be disqualified from receiving such governmental benefits. By making a Supplemental Needs Trust part of the beneficiary clause of an Irrevocable Trust, the disabled person will be quickly provided for without the delays and costs of Probate.

Unfortunately for many of our clients with cooperative shares of property, planning with trusts is not an option, because of the cooperative regulations. While many cooperative boards have recently become more amenable to planning with trusts there are still many cooperatives that do not allow transfers of cooperative shares to any type of trust. Since our clients’ homes are frequently the most valuable asset they own, it would be invaluable to their families if they could participate in the type of trust.

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