One of the main reasons why it is important to work with an attorney to devise your estate plan is because as a layperson, it is unlikely that you would understand all of your options. There are many different ways to proceed, and the optimal course of action will depend upon the circumstances.
A major misconception that often enters the picture is the idea that trusts are only used by very wealthy people. The above statement could potentially be true, but you would have to remove the word “only.”
There are different types of trusts, and they serve varying different aims. Some of them can be very useful for folks that are not among the financial elite. Let’s drill down a bit to provide an explanation.
Some trusts are irrevocable, and the name is self-explanatory. The fact that you cannot rescind or dissolve the trust once it has been created has certain implications.
In legal parlance, when you establish an irrevocable trust, you are surrendering incidents of ownership of the resources that you convey into it. That’s a fancy way to say that you as an individual no longer own the assets; they belong to the trust.
Why would you ever want to get yourself into this situation?
The majority of senior citizens will need help with their activities of daily living at some point in time. According to the United States Department of Health and Human Services, 35 percent of them will eventually reside in nursing homes.
We have office in Essex Junction, Vermont. Coincidentally, the median annual charge for nursing home care in both places is just under $150,000. The average length of stay is one year, and married couples have to be prepared for two different sets of nursing home bills.
Many would say that it is not fair, but Medicare does not pay for the custodial care that nursing homes provide. Medicaid does cover long-term care, and it has become the de facto source of long-term care insurance in the United States.
You are probably aware of the fact that Medicaid is a need-based program, so you cannot qualify if your countable assets exceed $2000 in value. The obvious solution would be to give gifts to your loved ones. This would essentially be an exercise in giving them their inheritances in advance.
Unfortunately, you cannot find out that you need long-term care today and give away your assets tomorrow to qualify for Medicaid. The gift giving must be completed at least five years before you submit your application for coverage.
This is why advance planning is key, and your nursing home asset protection strategy can be built around an irrevocable income-only Medicaid trust. Since you would be surrendering incidents of ownership, the principal would not be counted if and when you apply for Medicaid.
If there are income producing assets in the trust, you can accept distributions of the appreciation until you actually qualify for Medicaid. About that point, most of the income would be diverted toward the cost of the care you are receiving.
Estate Tax Efficiency
There are irrevocable trusts that very wealthy people use to gain estate tax efficiency. Assets that have been conveyed into these trusts are no longer part of your estate for tax purposes.
Generation-skipping trusts, charitable lead trusts, grantor retained annuity trusts, and qualified personal residence trusts are some of the options.
Revocable Living Trusts
The revocable living trust is in a different category. Since you can choose to revoke this type of trust, you retain incidents of ownership. As a result, assets in the trust would be part of your estate, and they would count if you were to apply for Medicaid.
There are many advantages to be gained if you use a living trust instead of a last will. One of them is the avoidance of probate. If you use a will instead of a living trust, it would be admitted to probate, which is a time-consuming and expensive legal process that strips your family of privacy.
Schedule a Remote Consultation!
If you are ready to put an estate plan in place, we are here to help. We are offering consultations through teleconferencing and video chat, so you can get the same level of service in a risk-free manner.
To schedule a consultation with an attorney from our Vermont office, you can give us a call at 802-879-7133 and you can use our contact page to send us a message if you would prefer to reach out electronically.