Many people are confused about the nature, type, and function of trusts created by Elder Law attorneys for their clients. Recently, I have written about the Medicaid Trust and the Pooled Income Trust. In this article, I will explain the revocable trust, also known as the “living” trust.
The revocable trust, like any trust, is a legally created entity or “person.” It starts with an agreement between the grantor or creator of the trust on the one hand, and the individual (called the “trustee”) who will manage the trust, on the other hand. Once the trust agreement is signed, the trust is funded with money or property that the grantor decides to transfer to the trust. Funding is accomplished, for example, by opening bank or investment accounts in the name of the trust and transferring financial assets into these accounts, or by executing new deeds to real estate transferring ownership to the trust.
In creating a revocable trust agreement, the grantor and the trustee can be – and usually are – the same individual. Thus, the grantor – who funds the trust with their own personal assets – remains in complete control of those assets as trustee. The grantor’s control of the trust is reinforced by the fact that they can revoke it, amend it, or add or remove assets, at any time.
Because the assets held by a revocable trust are always within the control of the grantor, these assets are not protected against claims by creditors of the grantor. In addition, the assets held in a revocable trust will be treated as the grantor’s countable resources by Medicaid in determining whether the grantor is eligible for Medicaid benefits.
Given these considerations, you might ask: why bother creating a revocable trust? The main reason is that the revocable trust is a very efficient estate planning device. The assets held in a revocable trust are governed by the trust agreement, and not by your Will or intestacy laws. Nobody has to petition a court, or seek court approval for distribution of the assets held by a trust. Nobody other than named beneficiaries is entitled to notice of distributions by a trust, or even of the existence of the trust itself. Thus, your estate plan – as expressed in the trust agreement – can be carried out very efficiently and privately.
The revocable trust allows you to avoid the expense and delay of probate or estate administration, and avoids the expense of ancillary proceedings if you own property in more than one state. Also, it minimizes the risk of family resentments turning into contentious matters in a courtroom.
While trust assets are not part of your probate estate, they remain part of your taxable estate. Of course, estate taxes have become a concern to fewer and fewer people as the exemption amounts have grown so high. For decedents dying in 2017, Federal Estate Tax is imposed only on taxable estates larger than $5,490,000, and surviving spouses are allowed the unused exemption amount of the first to die, resulting in a total Federal exemption for married couples of at least $10,980,000. https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax. Only about one-tenth of one percent (0.1%) of estates are now subject to Federal Estate Tax. In New York State, the exemption amount for state estate tax purposes is increasing to $5,250,000 in 2017. https://www.tax.ny.gov/pit/estate/etidx.htm.
Apart from estate planning considerations, a frequent reason for creating a revocable trust is that it can quickly and easily be converted into an asset protection trust, such as a Medicaid Trust. This can be accomplished very simply by the grantor amending the trust to make it irrevocable, and by resigning as trustee. All of the hard work will already have been done, e.g., thinking through and creating the estate plan within the trust, opening new accounts, preparing new deeds, and funding the trust.
In other words, the revocable trust can be a very significant preparatory step toward implementing a plan to achieve Medicaid eligibility and obtain long-term care benefits, without giving up control of your assets until you are comfortable doing so.
If you would like to know more about creating a trust, please contact Lamson & Cutner, P.C., for advice from one of our knowledgeable and experienced Elder Law attorneys.