a simple plan

Some Trusts Limit Asset Protection Planning

We have had the unfortunate situation with some married clients over the past year of finding that the revocable living trusts prepared in the past severely limited the possibility of asset protection planning when facing long term care.  Many people have been sold revocable living trusts for the express purpose of “avoiding probate.”  Others prepared revocable living trusts in order to save estate taxes when the exclusion amount for estate tax purposes was far lower than it is today.  Today, trust planning for tax purposes is not needed unless a couple has a taxable estate of $5,430,000.

When revocable living trusts were prepared for tax purposes, each spouse usually had a separate revocable living trust which could only be amended by that spouse.  When revocable living trusts were done for probate avoidance, the trusts often provided that amendment requires joinder by both spouses or that each spouse had the ability to remove only that amount which the spouse contributed to the trust.

Care-giver spouses approached us at a time that their spouse had lost capacity to make changes to legal documents.  Losing capacity may happen suddenly (such as when a person has a major, debilitating stroke) or slowly when a person has a dementia process progressing.

But for these restrictive terms in the revocable living trusts, the assets could be shifted to the care-giver spouse for restructuring enabling either the VA system or the Medicaid system to be utilized.  Were it not for the trusts, we are usually able to preserve a couple’s resources if they are unable to pay for long term care needs from income alone.  With the trusts asset protection planning is limited to preserving the amount in the care-giver spouse’s trust, or the amount contributed by the care-giver spouse to a joint trust.

Estate Planning should consider not only taxes, probate avoidance and distribution of assets upon death; it should consider the possibility of long term care and the possibility of spousal impoverishment by poor planning.

Leave a Reply