Trust-based estate planning is an effective way to protect your legacy and provide for your family once you are gone. While the topic may seem overwhelming, there are Elder Law Attorneys who specialize in this type of estate planning who make the task of establishing a trust much less daunting. The first part of this two-part series on Trusts discussed the Revocable Trust – now we’ll take a broad overview of Irrevocable Trusts and other types of specialty trusts.
Understanding the basics of a trust can be empowering as you prepare for your consultation with an experienced estate planning attorney. Though your attorney will help you pick the trust that will be best for you and your situation, being familiar with a few key concepts can make the process a little more comfortable. Let’s get familiar with basic terms.
Who is Involved in a Trust?
There are three roles that are specified in any trust document. This includes the person creating the trust (Grantor/Settlor/Trustor), the person assigned to execute the document (Trustee), and those benefiting from the trust (Beneficiaries). In the case of a Revocable Trust, the person who creates the trust is the Grantor until incapacity or death. With an Irrevocable Trust, the Grantor gives immediate power of the trust to a Trustee.
Roles in a Trust
Grantor
Trustee
Beneficiary
Trusts are intended to protect your assets and ensure that your beneficiaries ultimately receive the benefits you intended to leave them after you pass away. While trusts can also help avoid the costly and lengthy process of probate, there is no guarantee this is effective asset protection while you are alive. An experienced estate planning attorney is key in guiding you to choose the most effective trust for your financial goals.
What is an Irrevocable Trust?
Unlike a Revocable Living Trust, an Irrevocable Trust is one that is not easily amended, changed, or terminated once it is signed. The permanence of this document may have you wondering if it is a good idea to get this type of trust. Inflexible though it may be, there are benefits to consider when it comes to an Irrevocable Trust.
3 Benefits of an Irrevocable Trust
- There are clear tax benefits for large estates.
- An irrevocable trust can provide asset protection from judgments and creditors.
- Help preserve wealth when applying for government benefits.
1. This is a clear advantage for those estates valued at $12.06 million (in 2022).
Tax considerations are one of the primary reasons an irrevocable trust is chosen. Because the trust “owns” the assets, the Grantor is relieved of the tax liability on any income generated by the assets. The trust assets are essentially removed from the Grantor’s taxable estate.
2. An individual with a high-profile career can benefit from an irrevocable trust.
Assets placed in an irrevocable trust are protected from judgments and creditors. If you are a doctor or attorney or otherwise subject to lawsuits, an irrevocable trust is a good way to protect assets. The irrevocable trust also protects the beneficiaries from creditors, such as with the spendthrift clause.
3. Government benefits have strict income and asset limitations.
An irrevocable trust is a legal way of preserving assets to avoid getting wiped out by the costs of long-term care. If your income exceeds the current income limit for Medicaid, for example, excess income can be diverted to a trust to maintain program eligibility. There are two commonly used trusts to accomplish this financial goal.
Legal Pathways for Medicaid Eligibility
Qualified Income Trust (QIT)
Pooled Income Trusts
A Qualified Income Trust, also known as a “Miller trust,” is a tightly controlled irrevocable trust where your income is deposited and has restrictions for the trustee as to what the trust can be used for. Approved costs include “a personal needs allowance” for the individual and spouse, if applicable, and medical care costs, including the cost of private health insurance premiums. Since the funds are legally owned by the trust – and not you – the money does not count against your Medicaid eligibility.
A Pooled Income Trust is not as common as a QIT and, as the name suggests, involves income from a number of people “pooled” together. Created and managed by non-profit organizations, a Pooled Income Trust manages the excess income (income over the long-term care income limit) of a large number of people. The income deposited by each individual into a Pooled Trust does not count toward the Medicaid eligibility limit which helps the individual obtain and retain their benefits.
How Does a Pooled Income Trust Work?
With proper planning and guidance from a knowledgeable Elder Law Attorney, an eligible individual can protect their income in a pooled trust. Excess income deposited into a pooled trust is accounted for through a separate account for each beneficiary of the trust. The non-profit organization invests and manages the funds and pays for supplemental needs not covered by public benefits such as:
Supplemental Needs Covered by a Trust
Living expenses (food, shelter, clothing)
Housing costs (rent, real estate taxes, utilities)
Supplemental nursing care
Private pay care services
Travel expenses and entertainment
Guardian and attorney fees
Which Trust is Best for You?
A trust is part of a comprehensive estate plan and does not stand alone. Assets must be coordinated between the individual and the chosen trust. Decisions must be made as to what trust to fund and how. This includes tax considerations and should always be discussed with qualified professionals.
Through this two-part series on trusts, you’ve become familiar with a few key terms and the basics of several kinds of trusts. Empowerment and choice in end-of-life decisions require you to take the first step and make a plan for aging. You will be surprised how much peace of mind comes with planning and exercising your right to choose your own path.
Where Do You Start with a Trust Fund?
A consultation with an experienced Estate Planning Attorney is a good place to start. The consultation will include a discussion that goes beyond just trust funding. Your Elder Law Attorney is interested in your goals for aging, the lifestyle you wish to continue, and your vision of end-of-life care. They want you to realize all those dreams and will choose a trust strategy that supports the life you envision and the legacy you want to leave.
What Age is Right to Start an Estate Plan?
Estate Planning should start at age 18. If you’re beyond 18 and don’t have an estate plan, then your age right now is the best time to start planning! Your estate plan will be a dynamic plan throughout your lifetime, and you can revisit it every few years to review and update your goals.
Everybody needs to start somewhere, so pick an Elder Law Attorney, schedule your consultation, and get started now. Elder law planning is deeply personal and your attorney will be your advocate, creating a plan with you to help you remain independent for as long as possible. Start protecting your assets and creating peace of mind for yourself and your family today.
Helping seniors protect their assets and create a long-term plan to maintain quality of life are two reasons Elder Law Attorneys are a Resource We Love. Read more about trusts and other estate planning strategies in the Legal and Financial Section of our Blog.