Types of Trusts for Elderly Asset Protection

A trust is a legal arrangement for managing property involving three roles: the grantor, who creates and funds the trust; the trustee, who manages the assets; and the beneficiary, who benefits from the trust. The trust document outlines the grantor’s instructions for managing assets during their lifetime and distributing them after death. This can include providing for loved ones, managing property if the grantor becomes incapacitated, or directing assets to charitable causes.

The Revocable Living Trust

A revocable living trust (RLT) is an estate planning tool used to manage a person’s assets and avoid the court-supervised probate process. Its defining feature is flexibility, as the grantor who creates the trust retains full control over the assets held within it. The grantor can change the terms, add or remove assets, or dissolve the trust at any point while they are mentally competent.

The grantor initially serves as their own trustee, managing the trust’s assets as they did before. The trust document also names a successor trustee, who is designated to step in and manage the trust’s affairs if the grantor becomes incapacitated or upon their death. This transition of control happens privately, without the need for court intervention.

From a tax perspective, a revocable living trust is considered a “grantor trust,” meaning it is invisible to the IRS during the grantor’s life. All income generated by trust assets is reported on the grantor’s personal income tax return, and no separate tax return is required for the trust. The assets within the RLT are also included in the grantor’s taxable estate for federal estate tax purposes.

The primary benefit of an RLT is its ability to bypass probate, the legal process of validating a will and distributing assets. For example, if a family home is titled in the name of a revocable trust, the successor trustee can transfer the home to the designated beneficiaries according to the trust’s instructions without a lengthy court proceeding. This ensures a quicker and more private transfer of assets.

Upon the grantor’s death, the successor trustee’s duties begin. This individual is responsible for gathering and inventorying all trust assets, obtaining certified copies of the death certificate, and notifying beneficiaries. The successor trustee must then pay any of the deceased’s final debts and taxes using trust funds before distributing the remaining assets to the beneficiaries as outlined in the trust document.

Irrevocable Trusts for Long-Term Care Planning

An irrevocable trust is a tool used for asset protection, particularly when planning for long-term care costs and qualifying for government benefits like Medicaid. Unlike a revocable trust, once a grantor creates an irrevocable trust and transfers assets into it, they cannot alter or cancel it. The grantor gives up control and ownership of the assets, a required step for asset protection.

The main reason for using this type of trust is to remove assets from the grantor’s name so they are not considered “countable assets” for Medicaid eligibility purposes. Medicaid has strict financial limits, and by transferring assets into a specially designed irrevocable trust, an individual can meet these requirements. This specific type of trust is often called a Medicaid Asset Protection Trust (MAPT).

A central component of this strategy is the Medicaid five-year look-back period. When an individual applies for long-term care Medicaid, the agency reviews all financial transactions made within the previous five years. If assets were transferred to the MAPT during this look-back period, it can trigger a penalty period, during which the individual will be ineligible for Medicaid benefits. This type of planning must be done well in advance of needing care.

The roles within a MAPT are structured to maintain this separation of control. The grantor cannot serve as the trustee; this role must be filled by someone else, such as an adult child or a trusted third party. While the grantor must give up access to the principal of the trust, the trust can be structured to allow the grantor to receive income generated by the trust’s assets, though this income is counted for Medicaid income-limit purposes.

After the five-year look-back period is satisfied, the assets held within the MAPT are protected and are not required to be spent on the grantor’s long-term care costs. For instance, if a primary residence is placed in the trust, the grantor can continue to live in the home, but the property itself is shielded from being counted as an asset by Medicaid. This allows the asset to be preserved for the beneficiaries named in the trust.

The Special Needs Trust

A Special Needs Trust (SNT) is a legal tool designed to hold assets for a person with a disability without compromising their eligibility for essential government benefits. Many public assistance programs, such as Supplemental Security Income (SSI) and Medicaid, have strict income and asset limits. An SNT allows a beneficiary to have access to funds for life-enhancing expenses while legally keeping those funds from being counted as a personal asset for benefit eligibility.

The funds in an SNT are intended to supplement, not replace, the basic support provided by public benefits. The trustee can make payments directly to third-party vendors for a wide range of goods and services that improve the beneficiary’s quality of life. These can include expenses for medical care not covered by Medicaid, educational programs, and transportation. The trustee cannot give cash directly to the beneficiary, as this would be counted as income and could reduce or eliminate their SSI payment.

For elderly individuals planning their estates, the most relevant type is a third-party SNT. This trust is established and funded by someone other than the disabled beneficiary, such as a parent or grandparent, as part of their will or living trust. The advantage of a third-party SNT is that upon the beneficiary’s death, any remaining funds in the trust do not have to be paid back to the state to reimburse Medicaid expenses.

This differs from a first-party SNT, which is funded with the disabled individual’s own money, such as from a personal injury settlement. While a first-party SNT also protects benefit eligibility, federal law requires that it include a “payback” provision. This provision mandates that upon the beneficiary’s death, any funds left in the trust must first be used to reimburse the state for all Medicaid benefits paid on their behalf.

Creating and Funding a Trust

Before a trust document can be drafted, several decisions must be made to ensure the trust reflects your intentions. This preparatory work streamlines the process of working with an attorney to create a legally sound document.

You will need to make decisions on the following:

• Trustee and Successor Trustee: Choose a responsible person or institution to manage the trust’s assets and at least one successor to take over if the initial trustee cannot serve.
• Beneficiaries: Clearly identify the full legal names of the people or entities who will receive assets from the trust.
• Distribution Instructions: Decide how and when assets will be distributed, such as in a lump sum, in staggered payments, or held in trust for a beneficiary’s lifetime.
• Asset Inventory: Compile a detailed list of all assets to be placed in the trust, including real estate, bank and brokerage accounts, and other valuable property.

Once these decisions are made, the first formal step is to hire an attorney to draft the trust agreement. After the document is prepared and reviewed, the grantor must sign it in the presence of a notary public to make it legally valid.

A signed trust document is not effective until it is funded, which is the process of transferring ownership of your assets from your name into the name of the trust. An unfunded trust will fail to achieve its goals for any assets not properly transferred.

The actions required for funding vary by asset type. For real estate, a new deed must be prepared and recorded with the county, changing the property’s owner to the name of the trust. For financial accounts, you must contact each institution to retitle the accounts in the trust’s name. For personal property without a formal title, a general transfer document can be signed that lists the items and declares them owned by the trust. For assets like retirement accounts and life insurance, you update the beneficiary designation forms to name the trust as the beneficiary.