proactive planning

Living Trusts Sometimes Impair Asset Protection Planning in a Crisis

Many clients come to us with Living Trusts (also known as “Revocable Trusts”) in place that were prepared 10-15 years ago when the amount that one could pass to beneficiaries without paying estate taxes was significantly lower. Trusts were needed back then to minimize estate taxes for these individuals. Since that time, the amount a person can pass without estate tax has been raised to $5,450,000; meaning that only .2%1 of the population would have to pay estate taxes.

So, while these clients may have had excellent legal advice at the time the documents were prepared and had a plan that met their goal of minimizing estate taxes, they now need to be considering a different reality. People are living longer and facing the costs of long term care. Middle class individuals are rarely prepared to pay the cost of nursing home care or significant home care.

Most Revocable Living Trusts do not contemplate facing a long term care crisis. At a time of crisis the grantor of the Living Trust may not be capable of amending or revoking it. Appropriate planning for the cost of long term care may involve restructuring assets to ensure the ability to use government benefits should a person become chronically ill.

We were recently hired by a spouse whose 70-year old husband had suffered a massive stroke. He requires long-term care in a nursing home. He has children from a first marriage who do not have a good relationship with his wife. Eleven years ago both spouses executed and funded revocable living trusts. The attorney who drafted the documents encouraged them to have living trusts in order to “avoid probate.” Each trust holds approximately $200,000. The husband is not legally capable of changing his documents because of his cognitive impairment. His trust provides that the income and principle of his trust be used to pay for his needs during his lifetime. His wife is named his successor trustee. If we were able to transfer the assets in the trust to the wife, she would be able to do planning so that he could immediately obtain Medicaid benefits. If all potential beneficiaries were to agree, there is a possibility of doing a non-judicial trust amendment. However, in this situation, the children refuse to communicate in any way with the spouse. Therefore, the assets in his trust will have to be depleted paying for the $10,000 per month nursing home bill until they are gone. After those assets are depleted, we will be able to protect the remaining $200,000 in the wife’s trust.

While we were able to protect part of the assets to ensure that wife was not impoverished by her husband’s care, the outcome would have been significantly better if we had been able to do the planning prior to the husband’s stroke. Pre-crisis planning can ensure a much better outcome.

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