People sometimes harbor misconceptions because they hear half-truths, which will often enter the picture in the estate planning realm. We will clear up one of these partial truths in this post.
Irrevocable Trusts
The notion we are going to look at here is the idea that you cannot revoke a trust after it has been created. Indeed, there are irrevocable trusts, and you cannot act as the trustee or dissolve this type of trust.
Why would you want to surrender control of the assets in this manner? There are reasons why you may want to remove resources from your own name, and nursing home asset protection is one of them.
More than one-third of senior citizens will ultimately reside in nursing homes, and these facilities are very expensive. It would be logical to assume that Medicare will pay for the assistance if you need it, but the program will not cover the custodial care that nursing homes provide.
Medicaid is another government program that will pay for a stay in a nursing home. Since it is only available to people with a significant level of financial need, there is a $2,000 asset limit.
If you convey assets into an irrevocable, income-only Medicaid trust, you could receive distributions of income that is generated by the trust’s assets. You would not be able to touch the principal, but the assets in the trust would not count if you apply for Medicaid.
There is one caveat to this statement. There is a five-year look-back period, so the assets must be signed over to the trust at least five years before you submit your application.
An irrevocable trust can also be used to provide an inheritance to a loved one with a disability without impacting need-based government benefits. High net-worth individuals that are exposed to estate taxes utilize irrevocable trusts to gain estate tax efficiency.
These are some of the reasons why you may want to use an irrevocable trust, but there are a number of others.
Revocable Living Trust
The revocable living trust is in a different category, and the name is self-explanatory. This type of trust takes effect while you are still living, and you can in fact revoke or dissolve the trust at any time.
You would act as the trustee, so your ability to utilize your assets as you see fit would not change. In the trust declaration, you would name a trustee to succeed you, and your heirs would be the beneficiaries.
Since you retain incidents of ownership, the assets would be available to litigants if you are sued, and they would be counted if you apply for Medicaid.
This type of trust will not satisfy those objectives, but a living trust will provide a number of very valuable benefits, and probate avoidance is one of them. The asset distributions would not be subject to probate, which is a costly and time-consuming legal process.
You can include spendthrift protections when you have a living trust, and this is a priority for some people. In additions, the estate administration process is streamlined, because ownership of the assets would be consolidated.
Many elders become unable to make sound decisions at some point in time due to cognitive impairment. When you have a revocable living trust, you can name a disability trustee to step into the role if it ever becomes necessary.
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