A Living Trust is a well-established estate planning tool designed primarily to avoid Probate of your estate when you die. There are many types of Living Trusts. The most common is a Revocable Living Trust. The person(s) creating the Living Trust is/are known as the “Settlor(s),” “Grantor(s),” or “Trustor(s).” All or a portion of your assets may be transferred to the Living Trust (during your lifetime: hence a “Living Trust”) to be held by a Trustee (most of the time you are the Trustee) for the benefit of your heirs. Because you have transferred your assets “during your lifetime,” when you die, there are no assets in your estate that need to go through Probate, which is a costly and time consuming Court process.
A properly drafted Living Trust may be revoked, cancelled, terminated, modified, or amended at any time during your lifetime. As the Trustee of your own Trust, you have all of the rights and powers to deal with the assets in the Trust as you would with your own assets. For example, you may sell, lease, mortgage, exchange, or make a gift of any or all of the Trust assets. In the majority of cases, the terms and provisions of your Living Trust remain private and may be held, administered, and distributed at a fraction of the cost of a Probate procedure.
In most cases, there are no adverse property, income, or gift tax consequences (the property and income tax remain the same). In appropriate circumstances, the Living Trust may be set-up to minimize or even avoid Federal Estate Tax. In 2012, a properly drafted Living Trust may allow a husband and wife to transfer 10 Million Dollars tax free!
DOES HAVING A LIVING TRUST AUTOMATICALLY PROTECT YOUR ASSETS FROM HEALTH CARE COSTS?
Living Trusts are a popular estate planning vehicle to avoid Court involvement in the administration of a decedent’s estate, large attorney’s fees, and lengthy delays in the distribution of assets. However, it is a common misunderstanding that a Living Trust is a shield from creditors, including lawsuits and Medi-Cal estate claims. In most cases, Living Trusts do not protect assets from claims and in fact if not properly done may add roadblocks to proper long term care planning.
One of the most common misunderstandings stems from the belief that because one has assets in a Living Trust, that person does not own the assets and therefore Medi-Cal, for example, can’t count them or subject them to recovery claims. In most situations, in fact, the person does control the assets. Consequently Medi-Cal and creditors can claim against them.
There are several ways a Living Trust can be utilized to protect assets from nursing home costs. There must be very specific clauses, containing very specific wording, in order to take advantage of these protections. If the language is not contained in the Trust document, the Trustee is powerless to take the steps necessary to protect the family’s assets. Very simply put, most trusts simply DO NOT allow the family to manage the trust to protect a lifetime’s work.
Some of the provisions that should be included in the trust are:
The authority to apply for Government health care benefits.
The authority to maximize eligibility for all health care programs.
The authority to take all steps to create eligibility.
The authority to make unconditional and unlimited gifts in excess of the Annual Federal Gift Tax Exclusion for non-taxable gifts.
The authority to undue community property from one spouse to another.
The authority to transfer assets to heirs to avoid estate claims.
The authority for either Trustor to amend the Trust.
The authority to amend the Trust using Power of Attorney.
Watch out for “Boiler Plate” provisions!
Many so-called “Estate Planning” attorneys and low cost trust mills, simply push a button on the computer and turn out a generic, one size fits all, Trust. These in many cases include provisions (or more importantly, lack provisions) that have no application to the client’s estate. One very common example is the creation of an A/B Trust, which freezes the deceased spouse’s one-half of the community property and makes a portion of the Trust IRREVOCABLE! The surviving spouse essentially loses all control over those assets. Remember, most trusts are created to deal with DEATH. People needing care may be incompetent or incapacitated but they are NOT DEAD. Most competent attorneys no longer do boiler plate A/B Trusts.
Durable Powers of Attorney must have very specific language in order to do Long Term Care planning for a person who is incompetent or incapacitated. These provisions generally include: broad gifting powers; powers to undue community to separate property; powers to take over the handling of one’s Living Trust if they are unable to do so, including the power to amend; the power to apply for and any steps necessary to obtain Public Benefits. They should also be immediate, not springing. Also extremely important is the ability to create a life-care contract. Remember that a Power of Attorney for Health Care does not allow someone to make financial decisions.
If your Trust and Powers of Attorney were created by a “Trust Mill” or other inexperienced professionals, or do not contain these provisions and safeguards, it is not too late. You CAN make changes, but it must be done while alive and competent. Don’t wait for circumstance to force decisions upon you.
*The foregoing report is designed solely for the purpose of providing very general and limited information on the subject matters. Readers should have their estate planning documents reviewed to determine their legal sufficiency and whether they need to be amended or replaced