There are many positive benefits that are realized if you utilize a revocable living trust as the centerpiece of your estate plan instead of a last will. Many people are pleasantly surprised when they hear that you do not lose control of assets that you convey into this type of trust. Of course, from the name of the trust, they know that it can be revoked. However, there are other forms of control that are retained when the trust is intact.
If you were to establish a revocable living trust, you would be called the grantor or settlor. The trustee is the individual or entity that would administer the trust, and the beneficiaries receive monetary distributions from the trust. As the grantor of this type of trust, you can act as the trustee and the beneficiary while you are still living, so you have total control every step of the way.
This may sound great on the surface, and it is for a significant percentage of the population. However, you are retaining incidents of ownership in a legal sense, because you maintain this level of control. As a result, in the eyes of the law, the assets are still in your direct possession.
Resources that have been conveyed into the trust would be part of your estate for estate tax purposes. If there was a legal judgment against you, assets in the living trust could be attached.
There is also the matter of Medicaid eligibility. The majority of elders will need long-term care at some point in time, and a lot of them will ultimately reside in nursing homes. Medicare does not pay for nursing home care, and it is very expensive. Medicaid will pick up the tab if you can qualify, but you cannot do so if you have a reasonable store of resources in your own name.
People sometimes divest themselves of direct personal possession of assets to qualify for Medicaid to pay for long-term care. Assets that are in a revocable living trust would be counted by Medicaid if you were to apply for coverage, so you would be denied.
Asset Protection Trusts
Fortunately, all is not lost if you want to protect assets, because there are other types of trusts. These would be irrevocable trusts, and you surrender incidents of ownership when you establish this type of legal device.
When it comes to Medicaid, people often choose to establish income-only irrevocable trusts. The assets in the trust would not be counted by Medicaid if and when you apply. However, you would be able to receive income that is generated by assets in the trust before you submit your application for Medicaid coverage.
High net worth individuals have to be concerned about the potential impact of the federal estate tax and its 40 percent maximum rate. There is $11.18 million exclusion in 2018. This is the amount that can be transferred before the estate tax would be applied. In New York, we also have a state-level estate tax that has a lower exclusion at the present time.
If you are faced with estate tax exposure, you could convey assets into a number of different types of irrevocable trusts to gain estate tax efficiency. Grantor retained annuity trusts, qualified personal residence trusts, charitable lead trusts, and generation-skipping trusts are some of the tools that are used to facilitate transfers at a tax discount.
Self-settled asset protection trusts can shield resources from future creditors. The way that it works is you convey assets into the trust, and you surrender incidents of ownership. You cannot direct the actions of the trust, but the trustee would have the discretionary ability to distribute the earnings from the trust and even portions of the principal to you or someone of your choosing.
Here in New York, self-settled asset protection trusts are not legal, but laws can always change in the future. This being stated, if you have a connection, or develop a connection to a state that does allow these trusts, you could establish the trust in that state and engage a resident of the state to act as the trustee.
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Mark S. Eghrari, Estate Planning Attorney
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