Many of you have heard the clarion call – “You need a revocable trust!” This cry emanates from the full page newspaper ads touting the one-day seminars on revocable trusts. This cry emanates from the 60-second spots on the radio informing you that your estate plan is not complete without a living trust. Such marketing tactics might lead one to believe that everyone should use a revocable trust. But is it a good idea for you?
While revocable trusts can be good estate planning tools, they are not for everyone. Any advertisement that implies this is misleading. Indeed, by using a revocable trust, seniors can lock themselves out of a powerful asset preservation strategy. Before reviewing that strategy, however, lets take a closer look at revocable trusts.
Trust as asset management tool.
A revocable trust, like a power of attorney, can be a good asset management tool. If one becomes incapacitated, her agent under a power of attorney can step in to manage her financial affairs, or, if the individual has a revocable trust, the person she has designated as her successor trustee likewise can step in to manage her affairs.
It is important in the latter instance, however, that all of her assets are titled in the name of the trust. Sometimes people attend the revocable trust seminars, and like pilgrims to a revival, they walk away as believers and quickly establish a trust for themselves but then take no action to retitle their assets. In that instance, the trust will be ineffectual.
If one does retitle his assets so they are owned by the trust, then a revocable trust will be effective in avoiding probate. This is one of the top reasons trust lawyers give when suggesting that everyone should use such a trust. However, probate typically is a simple and straight-forward procedure, often no less complicated than retitling one’s assets into a trust in the first place, and often at a cost that is similar to the costs associated with setting up a revocable trust.
Thus, avoiding probate as an end in itself may not be a sufficient cause to use a revocable trust. In certain circumstances, however, avoiding probate can be very beneficial. For example, if you own real estate in more than one state, then you will have to undergo probate in both states when you die. In that instance, using a revocable trust can be an effective means of avoiding two probate proceedings. Even so, a trust may not be the only way to avoid probate in the second state. For example, you often can change your deed so that the property passes outside of probate instead of using a trust for this purpose.
Losing an asset preservation strategy.
The problem with using a revocable trust often overlooked by planners who recommend them is that by employing such a trust the individual will lock in a five year Medicaid lookback period. What does this mean?
When an individual requires nursing home care it often is possible to set aside assets to pass to one’s heirs and have Medicaid pay for the nursing home. One method of doing so is to make a gift to one’s adult children and then waiting for three years before entering a nursing home. This is possible because there currently is a three year “lookback period”. The lookback period is the period of time preceding one’s entry into a nursing home for which the individual must disclose any gifts. If the gift took place before the lookback period, then it will not cause the individual to lose Medicaid eligibility.
Five year lookback period with a trust.
The reason a revocable trust can cause problems is that if one put his assets into such a trust, then the lookback period will be five years, making it much harder to do advance gift planning in anticipation of requiring future nursing home care.
Estate planners need to be aware of elder law issues.
As people live longer thereby increasing the likelihood that they may need nursing home care in the future, it becomes more important that their estate planning advisors also have a firm grasp of the rules and regulations governing their eligibility for public benefit programs.
William M. Gatesman has been a leader in educating professionals in how to do estate planning and Medicaid asset preservation planning without overlooking either of those areas. A good planner will know public benefits law and estate planning principles and will have a firm grasp of income and estate tax rules and regulations.