Is your estate plan structured to provide you or your loved ones long-term protection against court interference, creditors, bankruptcy, divorcing spouses, financial mismanagement and dissipation of all of your assets as a result of a long-term care scenario? If it’s not doing this, and you have some of these concerns either regarding yourself or your children or grandchildren, then you may want to consider trust-based estate planning.
Depending on what your concerns are, you may want to look at one or more of the following kinds of trusts.
Revocable Living Trusts. A revocable living trust can be used to manage and ultimately transfer various assets that you own easily and without court involvement. Your trust can own your real estate, investments, stocks, bonds, life insurance, bank accounts, business interests and more. By having your trust as the owner of these assets, or the beneficiary, your estate will be kept out of probate and everything will be under one set of instructions and under one person in charge of carrying out your wishes. How you want your trust assets distributed is controlled by the instructions you leave, so you can easily provide protection and assistance as necessary for young or inexperienced beneficiaries, or for your children to protect their shares from possible creditors, bankruptcies or divorcing spouses. You may be the trustee while you are living and appoint a successor trustee should you become incapacitated or upon your death. Because your trust is revocable, you maintain control and the flexibility to make whatever changes are necessary as life goes on and circumstances change. In addition, your trust can incorporate trust protectors or decanting powers (the ability to move assets to another trust) to account for the uncertainty about the estate, gift and income taxes.
Let’s look at a quick example. Mom wants to divide her estate equally among her three daughters. She puts one daughter on a transfer on death deed, names another as beneficiary on life insurance and puts the third daughter on her bank account. At the time that she does this each of the assets is of equal value. Time goes on. Mom lets the life insurance lapse; she sells the house and puts the money into the bank account. If Mom dies, one daughter gets everything, and if that daughter has some creditor problem at the time of Mom’s death, what she owns is exposed to those creditors. Also, since she owns it all, it’s up to her if she wants to share with her sisters.
However, if Mom had put those assets into a revocable living trust, she can designate within her trust that everything is to be divided equally among her daughters. Even if the life insurance lapses or she sells her home, the remaining funds are divided equally. That is why not only is putting the instructions you want into the trust important, it is critical that you “fund” your trust, which means change the title or beneficiary of your assets to your trust.
How should you set up your trust so that your beneficiaries are protected? If you establish lifetime trusts for your beneficiaries which allow for distributions for health, education, maintenance and support, you have afforded your beneficiaries some level of creditor protection. Depending on whether you want your beneficiary to serve as a sole trustee or cotrustee of that trust, or not be a trustee at all, that will affect the level of protection you give them.
Standalone Retirement Trust. If you have a large retirement account which you want to pass to your heirs, you may want to consider setting up a standalone retirement trust. If you name your children or grandchildren as beneficiaries on your accounts, that may be a great income tax advantage for them. However, if you are worried that they will cash in the account immediately upon your death, that will not only trigger all the taxes, but will expose those funds
to their possible mismanagement as well as creditors and divorce settlements. A standalone retirement trust (SRT) can improve the outcomes for those beneficiaries and force a “stretch-out” if that’s what you want, which also allows the account to continue to grow tax-deferred.
Medicaid or Veterans Asset Protection Trust. This kind of trust is irrevocable as the purpose of this trust is to protect your assets from having to be used for your long-term care and not counted toward eligibility for either Medicaid or Veterans benefits if such benefits are sought in the future. You are not the trustee of this kind of trust nor are you a beneficiary. You name someone else to serve in both of those roles. Typically, those are one or more of your children, as by transferring your assets into this trust, you are moving them out of your name and gifting them to those persons, but in a manner that the assets are protected from the same dangers as we mentioned above. The trustee usually has the ability to make distributions from the trust to one of the “lifetime” beneficiaries (i.e., beneficiaries during your lifetime) with the intention, although no legal liability, to give some of those back to you if you need them. Then upon your death those assets are distributed according to your wishes, just like your revocable trust. For Medicaid qualification, there is currently a five-year look back so as you transfer assets into this trust, you are beginning the clock on the five years. After five years, anything in the trust is not counted for you for Medicaid purposes and is not considered an impermissible transfer and thus disqualifying for Medicaid. The VA eligibility rules may be changing, so although technically there is no look back for VA purposes, I wouldn’t count on that. The most important consideration you have in setting up a trust like this is whether you are ready to give up control of the assets you transfer into the trust.
Domestic Asset Protection Trust. This is also an irrevocable trust, but one of which you can remain a beneficiary. There are stricter requirements on how much you can transfer into this trust and whether any transfers can be done if you already have or are aware of existing creditors. This kind of trust is very useful, but may be beyond the scope of a thorough explanation here.
As you can see, there are many trust-based strategies available to you depending on your goals and concerns. They should certainly be discussed with your estate planning attorney to see if any one or more of them make sense for you.
Marie Mirro Edmonds