A common misconception in the arena of Estate Planning is that trusts are only for people with large amounts of money, trying to avoid taxes. It is first important to understand that there are many different types of trusts, each serving a different purpose. One type of trust, a Revocable Trust, serves only to avoid the probate process after death. Many of our clients choose to create a type of irrevocable trust known as a Medicaid Qualifying Trust or a Medicaid Asset Protection Trust. As the name suggests, the purpose of these trusts is not just to avoid probate but also to protect assets to allow a client to be eligible for Medicaid.
Regardless of whether a client creates a trust or executes a last will and testament, each document can state that the assets go on to the beneficiaries, often the children, in a trust that gives them protection from creditors, including divorcing spouses. The assets that are left to your children in this type of trust are considered separate and apart from the marital estate.
In this type of trust, the beneficiary can be their own trustee. As trustee, he or she can distribute to oneself for health, education, maintenance or support. If the beneficiary wants a distribution for any other reason, they can appoint an independent trustee to make this distribution. The appointment of the independent trustee can be a one-time “trustee for a day” and the appointed trustee can be any person not related to the beneficiary by blood or marriage. Most of these trusts state that the beneficiary will receive all income generated from the trust; because of this, the income generated by trust assets is taxed at the beneficiary’s individual tax rate rather than at the much higher trust tax rate.
If a client is concerned that the beneficiary is not responsible enough to be her own trustee, a different individual can be named to manage and distribute the trust assets. The trust document can provide that the beneficiary becomes co-trustee at a stated age and then maybe becomes the sole trustee at a later age. This often gives the client peace of mind that the beneficiary will learn how to manage the trust assets over time rather than be thrown into the responsibility.
Remember, when you are creating a last will and testament or a trust document you are creating an “estate plan.” The first part of the plan is to draft the documents. The second part of the plan is to make sure that at your death your assets will flow into the trusts that you have created. In order to make sure retirement assets, life insurance proceeds, and other types of assets flow into the descendant’s trust for your beneficiary, you must designate the specific trust as beneficiary of those plans and accounts. Your estate planning should be able to protect you as well as your beneficiaries after your death. A properly drafted document can include protections for your beneficiaries that are far beyond the protections they could create for themselves.
- Britt Burner, Esq. and Nancy Burner, Esq.