Why revocable or irrevocable trusts for estate planning

In dealing with Medicaid structuring and estate planning, I am often asked whether a trust could be the answer. Trusts are not an easy subject to understand. Even with right answers, changes in laws, regulations and Court decisions could change the answer.

Here are some ideas:

• Revocable (Living) Trusts. A revocable trust can be changed by the person (the “Settlor” or Trust Maker) who made it. After drafting, executing and funding the trust, the Trust Maker can change his or her mind about the terms or discontinue the trust entirely. Because it can be changed, for tax purposes and many other purposes, a revocable living trust is treated generally as though the Settlor did not give the assets away in the first place. It keeps the same Social Security number and the assets are taxed in the same way as though it remained in the Trust Maker’s name. For long term care, assets are still considered available, so revocable living trusts do not help for Medicaid planning.

There are still some reasons why in an appropriate case an individual or couple might use a revocable living trust. One of these is to have a mechanism in place that can manage and continue when one or both of the Trust Makers become disabled. Note, however, that this might also be done with a well drafted Power of Attorney.

It also makes a difference where you live. If you live in states like California, Florida, Virginia or New York where probate is more difficult than in Pennsylvania it could make more sense to have a Living Trust than in this state. This is not to say that Pennsylvania probate is that simple but in a number of states it is harder and more expensive. If you are moving to another state or from another state you might consider looking at your estate documents to see whether they fit your current situation.

Working on the drafting of a revocable trust might force people to think through what they really want. However, again, this kind of planning might also be done will Wills and Powers of Attorney in most cases.

In order to make the Trust work, assets need to be transferred into the trust. Setting up a living trust without putting anything into it is like constructing a box without depositing anything into it. Living trusts only work well with a good coordinated plan. If you have assets in your own name at the time of your death and you

want the assets to be handled in trust, you need to have a “pourover will” that pours the assets into the name of the trust at the time of your death. If you have assets that are jointly titled with right of survivorship or have beneficiaries like life insurance or retirement accounts (IRA’s, 401(k)’s etc), then the assets go to the joint owner or to the beneficiary and not into the living trust.

• Irrevocable Trusts. An Irrevocable Trust is one that, once established and funded, cannot be changed, at least theoretically. It is a lot like giving the assets away and is similarly treated for tax and other purposes, often with its own Social Security number separate from yours.

Again, it depends. The important thing is that it takes on its own life. Separate tax returns are required. For Medicaid purposes, a transfer to an Irrevocable Trust is treated as a gift so it is subject to the five year lookback provisions of the Medicaid rules. You should not pull one out of a form book or go to an advisor who is unfamiliar with them. Here are some uses: • Creditor Protection and Special Needs: One possibility is you do not want to give away assets to beneficiaries who have substantial debt (spendthrift trust) or who are receiving government benefits (special needs trust).

• Tax Structuring: Specialized trusts benefiting charities may have significant tax benefits for the donor both during lifetime and after death.

• Irrevocable Income Only Trusts: For Medicaid planning where there are sufficient other assets or resources outside the trust, an IIOT can be considered. This may be especially helpful in protecting vacation properties for succeeding generations of the family.

••• The important point is to get professional advice where needed.

Janet Colliton, Esq. is a Certified Elder Law Attorney and limits her practice to elder law, retirement and estate planning, Medicaid, Medicare, life care and special needs at 790 East Market St., Suite 250, West Chester, Pa., 19382, 610-436-6674, colliton@collitonlaw.com. She is a member of the National Academy of Elder Law Attorneys and, with Jeffrey Jones, CSA, cofounder of Life Transition Services LLC, a service for families with long term care needs. Tune in on Wednesdays at 4 p.m. to radio WCHE 1520, “50+ Planning Ahead,” with Janet Colliton, Colliton Elder Law Associates, and Phil McFadden, Home Instead Senior Care.