Let’s talk about trusts.
I have my morning routine down. The alarm goes off, I jump in the shower, and immediately throw on my robe and put my hair in a towel.
This is followed by a race to the kitchen to grab a cup of coffee. I carefully walk upstairs, making sure not to spill a drop of my much-needed caffeine. Then the task of finding something to wear begins. I usually stand in the middle of my closet, sipping my coffee and trying to narrow down my options.
I relish this moment. The moment I get to myself. With my coffee, standing in my closet, before my kids wake up. A moment that is just about me. These moments are very rare. It is in those moments that I plan my day.
Once my day is planned, I can carefully select the outfit that matches my day. If I don’t take this moment, I usually end up emptying the contents of my closet onto my bed scrambling for anything that is clean and fits. I need my moment with my coffee, standing in my closet, planning, or I’m a mess.
But what does my morning routine have to do with trusts?
Well, trusts are an amazing estate planning tool; however, a trust must be carefully selected to match your life. It is not something to rush into, as often it cannot be easily undone. Trusts require a moment.
A moment to sip your coffee, and contemplate what your goals are, and to craft a trust that fits those goals. Unfortunately, many people are advised to execute a trust and then immediately act instead of taking a moment to make sure that their individual goals are aligned with what the trust will accomplish.
What types of trusts are there?
There are many types of trusts, and not one-size fits all. Depending on the reason and purpose for establishing a trust, the trust may look and be very different. There are revocable and irrevocable trusts.
Trusts can be created during one’s life (Inter-Vivos), or trusts may be established through an individual’s last will and testament (testamentary). Trusts can have many different purposes, such as to provide for minors, to protect assets for an individual with special needs, to minimize federal estate tax, or to protect from long-term care costs, just to name a few.
How do I make a trust?
Although there are many types of trusts created for many different reasons, every trust has a few things in common.
First, each trust must have a donor. The donor is the person who is putting the assets in the trust.
Second, a trust must have a trustee, or the person that manages the trust assets and administers the trust in accordance with the terms of the document.
Third, the trust must have a beneficiary. The beneficiary is the person for whom the trust was established to benefit. This is the person that the donor intends to receive the assets owned by the trust.
As I mentioned, there are many different types of trusts, created for vastly different reasons; most commonly, people look to create a trust for protection. I am going to focus on two specific trusts, special needs trusts and irrevocable asset protection trusts.
What is a special needs trust?
A special needs trust is an important element of planning for a disabled child, grandchild, or intended beneficiary. Special needs trusts can be created not only for a disabled minor but also a disabled adult.
A special needs trust is constructed in a way that allows a disabled beneficiary to receive inheritances, gifts, lawsuit settlements, or other funds and yet not lose her eligibility for certain government programs, such as Medicaid, Section 8 housing, Supplemental Security Income (SSI), etc. The trusts are drafted so that the funds will not be considered to belong to the beneficiary in determining her eligibility for public benefits.
The trust’s purpose is not to provide for basic support such as food and shelter, as the public benefits are designed to provide for these. Instead, the trust supplements the beneficiary’s public benefits by allowing the trustee to distribute money to the beneficiary to increase the beneficiary’s quality of life. Therefore, special needs trusts typically pay for things like education, recreation, entertainment, counseling, and medical care that is not covered by benefits.
What trust do you need to plan for Medicaid?
One tool used by elder law attorneys for Medicaid planning is an irrevocable asset protection trust.
This type of planning must be done very carefully. But with this planning you may be able to preserve some assets for your children or other heirs while meeting the Medicaid asset limit and therefore qualifying for Medicaid benefits.
The irrevocable trust would hold certain assets, and as a result, those assets would not be countable for Medicaid eligibility and would be protected from estate recovery if you should ever need Medicaid.
However, the assets in the trust would also not be accessible to you, but would be accessible to people that you choose. Those people are called “lifetime beneficiaries” and are often one or more children or close relatives.
Keep in mind that assets in this irrevocable trust will be protected only after a period of 60 months, called the “lookback period.”
This is a term used by Medicaid as the period in which the agency has the right to review your financial transactions and for you to disclose any transfers made during that period. If transfers were made during that 60-month period, then a transfer penalty, or period of ineligibility, will be assessed by Medicaid.
Once 60 months have passed from the date you transfer assets into this trust, the trust might not need to be disclosed (unless an income right was retained) and Medicaid should not assess a penalty—barring any retroactive changes to the law.
Trusts are an amazing estate planning tool. However, make sure that you are carefully selecting and crafting your trust to fit your goals and purposes.
Take a moment, sip your coffee and contemplate what your goals are before creating a trust.
Please contact us at O’Donnell, Weiss & Mattei, Rebecca A. Hobbs, at 610-323-2800 to discuss your estate and long-term care planning goals, and how a trust may help you accomplish those goals.
— Written by Rebecca A. Hobbs, Esquire, CELA*
*Certified as an Elder Law Attorney by the National Elder Law Foundation as authorized by the Pennsylvania Supreme Court.