Some people brush aside the possibility of the utilization of a trust because they harbor a misconception. They are under the impression that you permanently surrender control of assets that you convey into any type of trust.
This stems from a bit of truth, but it is not an absolute, and we will provide clarity in this post.
Incidents of Ownership
There is a legal concept called “incidents of ownership” that is operative here. In some cases, you would use a trust because you want to surrender incidents of ownership.
These are irrevocable trusts, and generally speaking, this type of trust cannot be dissolved (though there are limited exceptions).
The revocable living trust is in another category. You can in fact dissolve or rescind this type of trust, and as a result, you would be retaining incidents of ownership.
Why would you want to surrender incidents of ownership with an irrevocable trust? One of the utilizations is for nursing home asset protection purposes.
Most senior citizens will require some form of living assistance eventually, and over 30 percent will reside in nursing homes. These facilities come with some hefty price tags, and in-home care is also very expensive.
Medicare does not pay for long-term custodial care, but Medicaid will cover these expenses if you can gain eligibility. Since Medicaid is only available to people with very limited resources, there is a $2000 asset ceiling.
You could convey assets into an irrevocable Medicaid trust with future eligibility in mind. The qualifier “future” is operative, because you have to fund the trust at least five years before you apply for Medicaid.
High net worth individuals that are exposed to the federal estate tax, or a state-level estate tax in a state outside of South Carolina, use irrevocable trusts to facilitate transfers at a tax discount.
An irrevocable trust can also be utilized to make a person with a disability more comfortable without impacting government benefits. These are a handful the different reasons why people use these trusts, but there are others that we will look at in a future post.
Revocable Living Trust
The revocable living trust is the most widely used estate planning device other than a simple will. These trusts are so popular because they provide benefits that you do not receive if you use a will as the centerpiece of your estate plan.
One of them is the simplified estate administration process. A will would be admitted to probate, and the court would provide supervision while the estate is being administered by the executor.
This is a time-consuming procedure, and no inheritances are distributed while the estate is being probated. Probate expenses will usually consume between three and seven percent of the estate, and there is a loss of privacy, because probate records are available to anyone that is interested.
Unless there is a testamentary trust in the will, inheritors receive lump sums with no asset protection or spending guardrails. This is another aspect that is less than ideal.
On the other hand, assets that are distributed through the terms of a living trust are not subject to probate. The resources would be protected from the beneficiary’s creditors, and the trustee could be instructed to provide measured distributions over an extended period of time.
These are some of the benefits that you would enjoy if you create a living trust. However, the assets would count for Medicaid purposes, they would not be protected from your own creditors while you are living, and they would be part of your estate.
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