Beware the Loving Trust

July 1, 2009 3:01 pm Bill Gatesman Medicaid

Some lawyers belong to an association that provides them with form legal documents.  One such form is the “Loving Trust”.  Within such document, there is an indication that the term “Loving Trust” is a certified trademark.  The trademark does not belong to the lawyer who “prepared” your trust.  Rather, it belongs to the company that provides the trust form to the lawyer.

Loving Trusts can be problematical.  A typical Loving Trust has provisions relating to “community property.”  Community Property is a special class of marital property with respect to which spouses have certain statutorily defined rights — but such is the case only in so-called “community property states” such as California.  Maryland is not a community property state, and a trust by a Maryland resident that has community property provisions at best is confusing and at worst could cause unintended consequences.

But there is a more serious problem with the Loving Trust.  The Loving Trust is a joint trust created by a husband and wife.  Only the husband and wife may modify or revoke the trust.  The trust may not be modified or revoked by the agent under a power of attorney for either husband or wife.  Moreover, once one spouse dies, the trust may not be revoked.

This is a problem because trusts can cause one to be ineligible for Medicaid.  If the trust is revocable, and the trust beneficiary requires nursing home care, then the trust can be revoked and the problem resolved.  If one is the beneficiary of a Loving Trust, however, and the spouse has died, then such trust may not be subject to revocation.  As a consequence, such trust may cause Medicaid ineligibility, or may prevent the surviving spouse from preserving assets.

And for estate planning purposes, because estate tax law has been fluctuating in recent years, it does not make sense to draft a trust that will become irrevocable and unmodifiable after one’s spouse dies.  Such trust cannot be changed to respond to changes in the estate tax law.  As a consequence, using a Loving Trust may result in the payment of estate taxes that otherwise could have been avoided.

Beware the Loving Trust.